Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) 4 OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2018

 

Commission File Number 000-49709

 

 

 

CARDIFF LEXINGTON CORP. (FORMERLY CARDIFF INTERNATIONAL, INC.)

(Exact name of registrant as specified in its charter)

 

Florida 84-1044583
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

401 East Las Olas Blvd., Suite 1400, Ft. Lauderdale, FL 33301

(Address of principal executive offices)

 

(844) 628-2100

(Registrant's telephone no., including area code)

 

Securities registered pursuant to Section 12(b) of the Exchange Act: None

 

Securities registered pursuant to Section 12(g) of the Exchange Act: Par Value $0.001 Common Stock Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes     No .

 

Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes     No .

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      No

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes     No

 

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K is contained in this form and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

 

  Large accelerated filer  Accelerated filer 
  Non-accelerated filer  Smaller reporting company 
  Emerging growth company   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes     No

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $1,378,430.

 

Common shares outstanding at April 12, 2019 is 1,494,353 (post-split) with a par value of $0.001.

 

 

 

   

 

 

FORM 10-K

CARDIFF LEXINGTON CORP

INDEX

 

  Page
   
PART I
   
Item 1. Business 1
   
Item 1A. Risk Factors 3
   
Item 1B. Unresolved Staff Comments 6
   
Item 2. Property 7
   
Item 3. Legal Proceedings 7
   
Item 4. Mine Safety Disclosures 7
   
PART II
   
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 8
   
Item 6. Selected Financial Data 9
   
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
   
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17
   
Item 8. Financial Statements and Supplementary Data 17
   
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 55
   
Item 9A. Controls and Procedures 55
   
Item 9B. Other Information 56
   
PART III
   
Item 10. Directors, Executive Officers and Corporate Governance 57
   
Item 11. Executive Compensation 59
   
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 60
   
Item 13. Certain Relationships and Related Transactions, and Director Independence 61
   
Item 14. Principal Accountant Fees and Services 62
   
PART IV
   
Item 15. Exhibits and Financial Statement Schedules 63
   
Signatures 64
   
Index to Financial Statements 18

 

 

 

 i 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K (this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward- looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

 

We cannot predict all the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved, and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. Considering these risks, uncertainties and assumptions, the events described in the forward- looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.

 

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

 

 

 

 ii 

 

 

PART I

 

Item 1. DESCRIPTION OF BUSINESS.

 

History of the Business

 

Legacy Card Company (“Legacy”) was formed as a Limited Liability Company on August 29, 2001. On April 18, 2005, Legacy converted from a California Limited Liability Company to a Nevada Corporation. On November 10, 2005, Legacy merged with Cardiff Lexington Corp (formerly Cardiff International, Inc.) (“Cardiff”, the “Company”), a publicly held corporation in Colorado. On August 27, 2014 Cardiff redomiciled to Florida.

 

In the first quarter of 2013, it was decided to restructure Cardiff into a holding company enabling businesses to take advantage of the power of a public company. Cardiff began targeting the acquisition of undervalued, niche companies with high growth potential, income-producing commercial real estate properties, and high return investments, all designed to pay a dividend to our shareholders. The reason for this strategy was to protect our shareholders by acquiring profitable small- to minimum-sized businesses with little to no debt, seeking support with both financing and management that had the ability to offer a return to investors. The plan is to establish new classes of preferred stock to streamline voting rights, negate debt, and acquire new businesses. By December 31, 2018, we have acquired eight (8) businesses: We Three (AHI); Romeo’s NY Pizza; Edge View Properties; Repiici’s Franchise Group; Refreshment Concepts; FDR Enterprises; Red Rock Travel Group and Platinum Tax Defenders. Cardiff currently has two potential new acquisitions pending.

 

BUSINESS DEVELOPMENTS

 

The following business developments have been reported in our reports filed with the Securities and Exchange Commission (the “SEC”), which are referenced in Part IV, Item 15, of this Annual Report:

 

We Three (dba) Affordable Housing Initiative acquired in April 2014

Romeo’s Alpharetta, LLC acquired in June 2014

Fortuna Restaurant Group, Inc. acquired in June 2014

R&T Restaurant Group, Inc. acquired in June 2014

Edge View Properties acquired July 2014

FDR Enterprises, Inc. acquired in August 2016;

Refreshment Concepts, LLC acquired in August 2016;

Repicci’s Franchise Group, LLC acquired in August 2016;

In May 2017 the Company terminated its auditing firm KLJ & Associates

July 2017 increased authorized common shares to 500,000,000 at par value of $0.001

July 2017 Engaged Malone Bailey as Cardiff’s new auditors

January 2018 changed name of Corporation to Cardiff Lexington Corporation

March 2018 increased authorized common shares to 1 Billion at par value of $0.01

Red Rock Travel Group, LLC acquired in July 2018

Platinum Tax Defenders acquired in July 2018

July 2018 amended the Preferred K Class Rights & Privileges

July 2018 created a new Preferred L Class of stock to acquire a new business

August 2018 the Company terminated its auditing firm Malone Bailey

August 2018 Engaged Daszkal Bolton as Cardiff’s new auditors

September 2018 increased authorized common shares to 2 Billion at par value of $0.001

November 2018 created a sub-class of Preferred K1 shares to raise investment funds for subsidiary

November 2018 increased authorized common shares to 5 Billion at par value of $0.001

December 2018 increase the authorized Blank Check shares to 1 Billion for future acquisitions

December 2018 filed a 14C increasing authorized common shares to 7.5 Billion at par value $0.001

December 2018 filed a 14C amending Rights & Privileges of all Preferred Classes of stock

 

 

 

 1 

 

 

Current Business Operations

 

Cardiff is a public holding company, much like a cooperative, leveraging proven management in private companies that become subsidiaries under our umbrella. Our focus is not based on a specific industry or geographic location, but rather on a proven management, market, and historical operating margin. We target acquisitions of mature, high growth, niche companies. Cardiff’s strategy identifies and empowers select income-producing middle market private businesses and commercial real estate properties.

 

The target company’s management team typically maintains control of the day to day operations. Acquisitions become standalone autonomous subsidiaries that gain the advantages of a publicly traded company without losing their independent management control. Management enjoys the advantage of improved valuation, liquidity, synergies, and support, along with diversification and asset appreciation through collective subsidiary performance. Diversification and pooled resources leverage value and mitigate risk.

 

Cardiff provides these companies both 1) the enhanced ability to raise money for operations or expansion, and 2) an equity exit and liquidity strategy for the owner, heirs, and/or Investors.

 

For investors, Cardiff provides a diversified lower risk to protect and safely enhance their investment by continually adding assets and holdings.

 

Cardiff employs a merge, acquire, and hold strategy to maximize value and potential of private, often family run, enterprises while providing diversification and risk mitigation for all shareholders.

 

Cardiff is led by strong and talented roster of executives and advisors providing expert acquisition, market guidance and added value for subsidiaries and investors. To date, Cardiff consists of the following whole-owned subsidiaries:

 

We Three, LLC (Affordable Housing Initiative); Romeo’s NY Pizza (merged Fortuna Restaurant Group and R & T Restaurant Group into Romeo’s Alpharetta); Edge View Properties, Inc; Repicci’s Franchise Group, Inc. (merged Refreshment Concepts, LLC into Repicci’s Franchise Group, Inc.); FDR Enterprises, Inc .; Red Rock Travel Group, LLC and Platinum Tax Defenders, LLC.

 

Organization

 

We are now comprised as one parent corporation holding company and seven operating subsidiaries.

 

Employees

 

Collectively, Cardiff and its subsidiaries employ approximately 70 employees and anticipates hiring additional personal with new acquisitions.

 

Competition

 

We are a Small Cap holding company enabling businesses to take advantage of the power of a public company. Cardiff began targeting the acquisition of undervalued, niche companies with high growth potential, income-producing commercial real estate properties, and high return investments, all designed to pay a dividend to our shareholders. The reason for this strategy was to protect our shareholders by acquiring profitable small- to minimum-sized businesses with little to no debt, seeking support with both financing and management that had the ability to offer a return to investors. The plan is to establish new classes of preferred stock to streamline voting rights, negate debt, and acquire new businesses.

 

Proprietary Information

 

We own the following trademarks: Cardiff USA; Mission Tuition, Legacy Card Company and Small Cap Rescue.

 

 

 

 2 

 

 

Government Regulation

 

We do not expect to be subject to material governmental regulation. However, it is our policy to fully comply with all governmental regulation and regulatory authorities.

 

Research and Development

 

We have spent funds on research and development finding an appropriate agency that could develop a new website representing the Company’s direction, keeping investors more informed, etc. We plan to spend further funds on research and development activities in the future to increase our social awareness.

 

Environmental Compliance

 

We believe that we are not subject to any material costs for compliance with any environmental laws.

 

How to Obtain our SEC Filings

 

We file annual, quarterly, and special reports, proxy statements, and other information with the Securities Exchange Commission (SEC). Reports, proxy statements and other information filed with the SEC can be inspected and copied at the public reference facilities of the SEC at 100 F Street N.E., Washington, DC 20549. Such material may also be accessed electronically by means of the SEC's website at www.sec.gov.

 

Our investor relations department can be contacted at our principal executive office located at, 401 East Las Olas Blvd. Unit 1400, Fort Lauderdale, FL 33301. Our telephone number is (844-628-2100).

 

Item 1A. RISK FACTORS

 

You should carefully consider the risks and uncertainties described below and the other information in this document before deciding to invest in shares of our common stock.

 

The occurrence of any of the following risks could materially and adversely affect our business, financial condition and operating result. In this case, the trading price of our common stock could decline, and you might lose all or part of your investment.

 

During our startup phase we were not profitable and generated minimal revenue and no profit.

 

As of this filing, though still not profitable, Cardiff is generating revenue which helps mitigate the risk. As a result, though pleased with our acquisitions, we may never become profitable, and could go out of business.

 

Since 2014, we have restructured ourselves into a holding company and have acquired seven additional businesses; We Three, LLC (Affordable Housing Initiative); Romeo’s NY Pizza (merged Fortuna Restaurant Group and R & T Restaurant Group into Romeo’s Alpharetta); Edge View Properties, Inc; Repicci’s Franchise Group, Inc. (merged Refreshment Concepts, LLC into Repicci’s Franchise Group, Inc.); FDR Enterprises, Inc.; Red Rock Travel Group, LLC and Platinum Tax Defenders, LLC.

 

 

 

 3 

 

 

Because  we had incurred operating losses from our inception, we still consider ourselves a going concern.

 

For the fiscal years ended December 31, 2018 and December 31, 2017 our auditors have included an emphasis paragraph about our ability to continue as a going concern, due to our continued losses and deficiencies in working capital. We believe our ability to achieve and maintain profitability and positive cash flow is dependent upon:

 

  · our ability to acquire profitable businesses within CDIF; and

 

  · our ability to generate substantial revenues; and

 

  · our ability to obtain additional financing

 

Based upon current plans, we may incur operating losses in future periods. Also, we expect approximately $600,000 in operating costs to be incurred over the next twelve months. We cannot guarantee that we will be successful in generating sufficient revenues or obtaining other financing in the future to cover these operating costs. Additionally, financing may not be available on terms favorable to the Company. Failure to generate sufficient revenues may cause us to go out of business.

 

Since we are an early stage company that has generated minimal revenue, an investment in our shares is highly risky and could result in a complete loss of your investment if we are unsuccessful in our business plans.

 

We were incorporated in August 2001 and have focused all our efforts on the development of our portfolio of companies which have doubled our revenue since 2017. However, there is no guarantee that we will be successful in realizing revenues or in achieving or sustaining positive cash flow at any time in the future. Any such failure could result in the possible closure of our business or force us to seek additional capital through loans or additional sales of our equity securities to continue business operations, which would dilute the value of any shares you hold and could result in the loss of your entire investment.

 

Future acquisitions are important to our success. We may not be able to successfully integrate our acquisitions into our operations.

 

The acquisition of new companies is central to our business model and critically important to our success. Although we generally seek companies that have positive cash flows, we cannot be certain that the company’s acquired will remain cash flow positive and could possibly lose revenues. In addition, there are no assurances that the acquisitions acquired will continue as profitable businesses and could adversely affect our business and any possible revenues.

  

Successful implementation of our business strategy depends on factors specific to acquiring successful businesses. Adverse changes in our acquisition process could undermine our business strategy and have a material adverse effect on our business, financial condition, and results of operations and cash flow:

 

  · The competitive environment in the specific field of business acquired; and

 

  · Our ability to acquire the right businesses that meet customers’ needs; and

 

  · Our ability to establish, maintain and eventually grow market share in a competitive environment.

 

 

 

 4 

 

 

There are no substantial barriers to acquire established businesses and because we can acquire businesses in all types of industries, there is no guarantee the Company will acquire additional businesses, which could severely limit our proposed sales and revenues. If we cannot acquire established businesses, it could result in the loss of your investment.

 

Since we have no copyright protection, unauthorized persons may attempt to copy aspects of our business, including our governance design or functionality, services or marketing materials. Any encroachment upon our corporate information, including the unauthorized use of our brand name, the use of a similar name by a competing company or a lawsuit initiated against us for infringement upon another company's proprietary information or improper use of their copyright, may affect our ability to create brand name recognition, cause customer confusion and/or have a detrimental effect on our business. Litigation or proceedings before the U.S. or International Patent and Trademark Offices may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and domain name and/or to determine the validity and scope of the proprietary rights of others. Any such infringement, litigation or adverse proceeding could result in substantial costs and diversion of resources and could seriously harm our business operations and/or results of operations. As a result, an investor could lose his or her entire investment.

 

The loss of the services of the current officers and directors could severely impact our business operations and future development, which could result in a loss of revenues and one’s ability to ever sell any shares.

 

Our performance is substantially dependent upon the professional expertise of the current officers and board of directors. Each has extensive expertise in business development and acquisitions and we are dependent on their abilities. If they are unable to perform their duties, this could have an adverse effect on business operations, financial condition and operating results if we are unable to replace them with other individuals qualified to develop and market our business. The loss of their services could result in a loss of revenues, which could result in a reduction of the value of any shares you hold as well as the complete loss of your investment.

 

Our stock has limited liquidity.

 

Our common stock trades on the OTC market. Trading volume in our shares may be sporadic and the price could experience volatility. If adverse market conditions exist, you may have difficulty selling your shares.

 

The market price of our common stock may fluctuate significantly in response to numerous factors, some of which are beyond our control, including the following:

 

  · actual or anticipated fluctuations in our operating results;

 

  · changes in financial estimates by securities analysts or our failure to perform in line with such estimates;

 

  · changes in market valuations of other companies, particularly those that market services such as ours;

 

  · announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

  · introduction of product enhancements that reduce the need for our products;

 

  · departure of key personnel.

 

 

 

 5 

 

 

In general, buying low-priced penny stocks is very risky and speculative. Our shares are defined as a penny stock under the Securities and Exchange Act of 1934, and rules of the Commission. You may not able to sell your shares when you want to do so, if at all.

 

Our shares are defined as a penny stock under the Securities and Exchange Act of 1934, and rules of the Commission. The Exchange Act and such penny stock rules generally impose additional sales practice and disclosure requirements on broker-dealers who sell our securities to persons other than certain accredited investors who are, generally, institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly with spouse, or in transactions not recommended by the broker-dealer. For transactions covered by the penny stock rules, a broker- dealer must make a suitability determination for each purchaser and receive the purchaser's written agreement prior to such sale. In addition, the broker-dealer must make certain mandated disclosures in penny stock transactions, including the actual sale or purchase price and actual bid and offer quotations, the compensation to be received by the broker-dealer and certain associated persons, and deliver certain disclosures required by the Commission. Consequently, the penny stock rules may affect the ability of broker-dealers to make a market in or trade our common stock and may also affect your ability to resell any shares you may purchase in the public markets.

 

Because of our size and limited resources, we may have difficulty establishing adequate management, legal and financial controls, which we are required to do in order to comply with U.S. GAAP and securities laws, and which could cause a materially adverse impact on our financial statements, the trading of our common stock and our business.

 

We are a small holding company that lacks the financial resources and qualified personnel to implement and sustain adequate internal controls As a result, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet proper internal control standards. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, material weaknesses or lack of compliance could result in restatements of our historical financial information, cause investors to lose confidence in our reported financial information, have an adverse impact on the trading price of our common stock, adversely affect our ability to access the capital markets and our ability to recruit personnel, lead to the delisting of our securities from the stock exchange on which they are traded, lead to litigation claims, thereby diverting management’s attention and resources, and which may lead to the payment of damages to the extent such claims are not resolved in our favor, lead to regulatory proceedings, which may result in sanctions, monetary or otherwise, and have a materially adverse effect on our reputation and business.

 

We do not expect to pay dividends on common stock in the foreseeable future.

 

We have not paid any cash dividends with respect to our common stock, and it is unlikely that we will pay any dividends on our common stock for the year. Earnings, if any, that we may realize will be retained in the business for further development and expansion.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

 

 

 6 

 

 

ITEM 2. DESCRIPTION OF PROPERTY.

 

The Company had operating lease expense of $242,567 and $176,062 for the year ended December 31, 2018 and 2017, respectively, consisting of the followings.

 

   For the year ended 
   December 31,
2018
   December 31,
2017
 
         
Restaurants  $72,121   $71,749 
Lot   73,782    68,962 
Office   96,664    35,351 
Equipment Rentals        
Total  $242,567   $176,062 

 

The Company has property leases that are renewable on an annual basis, with one long term property lease as of December 31, 2018 through its subsidiary Red Rock Travel Group. This is a four-year lease expiring on May 31, 20122. PTD entered into a new three-year lease effective January 2019.

 

Edge View Properties consists of 30 prime acres of land; 23.5 acres zoned MDR (Medium Density Residential) with 12 lots already platted and 48 lots zoned HDR (High Density Residential), 4 acres of dedicated river front property zoned for recreation on the Salmon River, Idaho's premier whitewater river and 2.5 acres zoned for commercial use. All land is in the city limits of Salmon and adjacent to the Frank church Wilderness Park (the largest wilderness park in the lower 48 states).

 

ITEM 3. LEGAL PROCEEDINGS.

 

We are not a party to any material legal proceedings, nor is our property the subject of any material legal proceeding.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

 

 

 

 

 

 

 

 

 

 

 7 

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Holders

 

As of December 31, 2018, there were 847 record holders of our common stock, and there were 901,441,498 (pre-split) shares of our common stock outstanding.

 

Public Market for Common Stock

 

Our common stock, par value $.001 per share (the “Common Stock”), is currently quoted on the OTCQB under the symbol “CDIX”. The OTC is a quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter, or the OTC, equity securities. An OTC equity security generally is any equity that is not listed or traded on a national securities exchange. The following table shows, for the periods indicated, the high and low bid prices per share of our common stock as reported by the OTC quotation service. These bid prices (pre-split) represent prices quoted by broker-dealers on the OTC quotation service. The quotations reflect inter- dealer prices, without retail mark-up, mark- down or commissions, and may not represent actual transactions.

 

    High Close     Low Close  
December 31, 2018             
1st Quarter  $.005   $ .001  
2nd Quarter  $.02   $ .002  
3rd Quarter  $.03   $ .01  
4th Quarter  $.05   $ .02  
December 31, 2017             
1st Quarter  $.13   $ .04  
2nd Quarter  $.16   $ .07  
3rd Quarter  $.11   $ .05  
4th Quarter  $.06   $ .02  

 

The market price of our common stock will be subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market, and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance.

 

The Securities Enforcement and Penny Stock Reform Act of 1990

 

The Securities and Exchange Commission has also adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system).

 

A purchaser is purchasing penny stock which limits the ability to sell the stock. The shares offered by this prospectus constitute penny stock under the Securities and Exchange Act. The shares will remain penny stocks for the foreseeable future. The classification of penny stock makes it more difficult for a broker-dealer to sell the stock into a secondary market, which makes it more difficult for a purchaser to liquidate his/her investment. Any broker-dealer engaged by the purchaser for the purpose of selling his or her shares in us will be subject to Rules 15g-1 through 15g-10 of the Securities and Exchange Act. Rather than creating a need to comply with those rules, some broker- dealers will refuse to attempt to sell penny stock.

 

 

 

 8 

 

 

The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the Commission, which:

 

  · contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading;

  · contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of the Securities Act of 1934, as amended;

  · contains a brief, clear, narrative description of a dealer market, including "bid" and "ask" prices for penny stocks and the significance of the spread between the bid and ask price;

  · contains a toll-free telephone number for inquiries on disciplinary actions;

  · defines significant terms in the disclosure document or in the conduct of trading penny stocks; and

  · contains such other information and is in such form (including language, type, size and format) as the Securities and Exchange Commission shall require by rule or regulation;

 

The broker-dealer also must provide, prior to effecting any transaction in a penny stock, to the customer:

 

  · the bid and offer quotations for the penny stock;

  · the compensation of the broker-dealer and its salesperson in the transaction;

  · the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and

  · monthly account statements showing the market value of each penny stock held in the customer's account.

 

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules; the broker- dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements will have the effect of reducing the trading activity in the secondary market for our stock because it will be subject to these penny stock rules. Therefore, stockholders may have difficulty selling their securities.

 

Dividend Policy

 

We have not previously declared or paid any dividends on our common stock and do not anticipate declaring any dividends in the foreseeable future. The payment of dividends on our common stock is within the discretion of our board of directors. We intend to retain any earnings for use in our operations and the expansion of our business. Payment of dividends in the future will depend on our future earnings, future capital needs and our operating and financial condition, among other factors that our board of directors may deem relevant. We are not under any contractual restriction as to our present or future ability to pay dividends.

 

ITEM 6. SELECTED FINANCIAL DATA

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Management’s Discussion and Analysis or Plan of Operation contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases, you can identify forward-looking statements by the use of words such as “may”, “will”, “should”, “anticipate”, “believe”, “expect”, “plan”, “future”, “intend”, “could”, “estimate”, “predict”, “hope”, “potential”, “continue”, or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including, but not limited to, the matters discussed in this report under the caption “Risk Factors”. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this prospectus. We undertake no obligation to publicly update any forward looking-statements, whether as a result of new information, future events or otherwise.

 

 

 

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The following discussion of our consolidated financial condition and consolidated results of operations should be read in conjunction with our consolidated financial statements and the related notes included in this report.

 

The following table provides selected financial data about us for the fiscal years ended December 31, 2018 and December 31, 2017. For detailed financial information, see the audited Financial Statements included in this report.

 

   As of   As of 
   December 31, 2018   December 31, 2017 
Assets:          
We Three  $318,285   $235,532 
Romeo’s NY Pizza   108,908    158,551 
Repicci’s Group   169,030    293,216 
Platinum Tax   60,578     
Red Rock Travel   8,114     
Others   2,676,152    631,762 
Consolidated assets  $3,341,066   $1,319,061 

 

Segment reporting for the years ended December 31, 2018 and 2017 were as follows:

 

For the year ended
   December 31, 2018   December 31, 2017 
Revenues:        
We Three  $186,096   $193,601 
Romeo’s NY Pizza   602,866    592,445 
Repicci's Group   538,156    835,968 
Platinum Tax   899,748     
Red Rock Travel   147,072     
Other       3,754 
Consolidated revenues  $2,373,938   $1,625,768 
           
Cost of Sales:          
We Three  $182,690   $155,416 
Romeo’s NY Pizza   446,880    429,779 
Repicci's Group   503,478    846,714 
Platinum Tax   337,986     
Red Rock Travel   156,664     
Other        
Consolidated cost of sales  $1,627,698   $1,431,909 
           
Income (Loss) before taxes          
We Three  $(1,468)  $(4,494)
Romeo’s NY Pizza   28,336    (185,299)
Repicci’s Group   (10,395)   (111,302)
Platinum Tax   (168,851)    
Red Rock Travel   (853,768)    
Others   (5,259,106)   (3,350,900)
Consolidated income/(loss) before taxes  $(6,265,251)  $(3,651,995)

 

 

 

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Results of Operations

 

Revenues. We had revenues in the amount of $2,373,938 and $1,625,768 for the years ended December 31, 2018 and 2017, respectively. The increase in revenue was primarily associated with our new acquisitions of Platinum Tax and Red Rock Travel. We expect revenue to increase during 2019, as we will realize a full operating cycle for our current operating subsidiaries and planned expansion.

 

Cost of Goods Sold. We had costs of sales in the amount of $1,627,698 and $1,431,909 for the years ended December 31, 2018 and 2017, respectively. The increase in cost of sales were also primarily attributable to the addition of our new subsidiaries in August 2018.

 

Operating Expenses. Operating expenses consisted of depreciation, amortization and general and administrative expenses. We had operating expenses of $4,953,408 and $3,186,399 for the years ended December 31, 2018 and 2017, respectively. The operating expenses in 2018 were primarily attributable to the issuance of 250,000,002 shares of preferred stock and 3,886,9330 shares of (pre- split) common stock, resulting in non-cash stock based compensation of $287,471 during the year ended December 31, 2018. Additionally, our expense related to salary and wages increased to $1,351,678 and professional fees were $391,136 for year ended December 31, 2018, compared to $741,261 and $80,000 for December 31, 2017, respectively. We had a loss due to impairment of goodwill of $932,529 and loss on disposal of assets of $38,584  from our Romeo’s Pizza stores , Other operating expenses remained relatively fixed for the year, for the years ended December 31, 2018 and 2017, respectively. During the year ended December 31, 2018, we recorded an asset impairment of $300,000 and goodwill impairments of $1,459,725, related to our acquisitions of Red Rock Travel Group and Platinum Tax Defenders.

 

Non-employee stock compensation. During the years ended December 31, 2018 and 2017, we issued a total of 3,886,930 and 1,306,907   shares of (pre-split) common stock (2,592 and 872 post-split shares), respectively, and 250,000,002 and -0- shares of preferred stock. The fair value of the stock issuance was determined by the fair value of the Company’s common stock on the grant date, at prices ranging from $0.0008-$0.02995  per share ($1.20 - $44.93 post split). Accordingly, we recognized stock based compensation of $287,471  and $285,623  for the years ended December 31, 2018 and 2017, respectively, in connection with these issuances.

 

Change in value of derivative liability. During the years ended December 31, 2018 and 2017 the change in value of derivative liability amounted to $(629,176) and $(36,469), respectively. In 2018, we issued 10 convertible promissory notes totaling $1,565,120, all of which were convertible into shares of the Company’s common stock at discount to the market. As a result, we had change in value of derivative liability amounted to $(629,176) We remeasured the fair value of the beneficial conversion derivative through the date of conversion (with a change to earnings), with the $1,870,625 derivative liability reclassified to paid-in capital at conversion.

 

Amortization of debt discounts. We had amortization of debt discount of $950,736 and $573,605 for years ended December 31, 2018 and 2017, respectively. Amortization of debt discount is related to our convertible debt.

 

Interest Expense during the years end December 31, 2018 and 2017, interest expense amounted to $360,331 and $111,682, respectively. The increase in interest was a result of new borrowings in 2018.

 

Net Loss. As a result of the foregoing, we had a net loss of $6,168,401 for the December 31, 2018, which is compared to the net loss for the December 31, 2017 of $3,651,995.

 

Our activities have a focus on growing revenue. We plan to continue this strategy into 2019.

 

To try to operate at a break-even level based upon our current level of proposed business activity, we believe that we must generate approximately $20,000,000 in revenue per year. Each dollar of revenue is not directly tied to increasing costs. We believe that we can become profitable without incurring additional costs under our current operating cost structure. However, if our forecasts are inaccurate, we will need to raise additional funds. If we need additional capital, our directors have informally agreed to loan such funds as may be necessary through December 31, 2019 for working capital purposes, although they have no obligation to do so.

 

 

 

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On the other hand, if we decide that we cannot operate at a profit in our current configuration, we may choose to scale back our operations to operate at break-even with a smaller level of business activity, while adjusting our overhead to meet the revenue from current operations. In such event, we will probably not be profitable. In addition, we expect that we will need to raise additional funds if we decide to pursue more rapid expansion, the development of new or enhanced services or products, appropriate responses to competitive pressures, or the acquisition of complementary businesses or technologies, or if we must respond to unanticipated events that require us to make additional investments. We cannot assure that additional financing will be available when needed on favorable terms, or at all.

 

We expect to incur operating losses in future periods because we will be incurring expenses and not generating sufficient revenues. We expect approximately $600,000 in operating costs over the next twelve months. We cannot guarantee that we will be successful in generating sufficient revenues or other funds in the future to cover these operating costs. Failure to generate sufficient revenues or additional financing when needed could cause us to go out of business.

 

Liquidity and Capital Resources

 

As of December 31, 2018, we had cash of $118,307 and a working capital deficit of $6,858,115. As of December 31, 2017, we had cash of $68,986 and a working capital deficit of $4,558,777.

 

Net cash used for operating activities was $(1,234,099) for the December 31, 2018, representing a $658,411 increase in the net cash used in operating activities of $(614,904) for the December 31, 2017. The increase in the amount of net cash used in operating activities in 2018 compared to last year was primarily attributable to a $26 million increase in net loss, offset by a greater amount of non-cash items in 2018 compared to 2017 such as common stock issued for services, accrued expenses and loss on impairment of Goodwill.

 

Net cash used in investing activities was $760,153 for the December 31, 2018 compared with cash used in investing activities was $12,800, during the December 31, 2017. The cash flows used in investing activities in 2018 was primarily attributable to the purchase of fixed assets related to the acquisition of Platinum Tax Defenders, offset by cash received from disposal of fixed assets.

 

Cash flows provided by financing activities were $1,842,153 for the December 31, 2018, which compares to cash flows provided by financing activities of $633,742 for the December 31, 2017. These cash flows were related to sales of stock in the amounts of $40,000 during the years ended December 31, 2017. During 2018, we received $1,783,656 in proceeds from issuances of convertible notes payable, offset by repayment of $40,000 in convertible notes. During 2017, we received $687,200 in proceeds from issuances of convertible notes payable, which were partially offset by repayments of $78,684.

 

There can be no assurance that we will be able to obtain sufficient capital from debt or equity transactions or from operations in the necessary time frame or on terms acceptable to us. Should we be unable to raise sufficient funds, we may be required to curtail our operating plans and possibly relinquish rights to portions of our technology or products. In addition, increases in expenses or delays in product development may adversely impact our cash position and may require cost reductions. No assurance can be given that we will be able to operate profitably on a consistent basis, or at all, in the future.

 

In order to continue our operations, development of our products, and implementation of our business plan, we need additional financing. We are currently attempting to obtain additional working capital in a term loan transaction.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements with any party.

 

Plan of Operation

 

At Cardiff, we acquire or merge with middle market companies by providing them the ability to have an infusion of equity into their business or providing them the ability to exit equity out of their company. Our focus is not industry or geographic-specific, but rather proven management, market and margin - we are opportunity oriented.

 

 

 

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We target acquisitions of mature, high growth, niche companies. Our target companies' proven management maintains full operational control, meaning our acquisitions become standalone autonomous subsidiaries that gain the advantages of a public company without losing their operational independence. For investors, our goal is to provide a diversified lower risk platform to protect and safely enhance your investment by continually adding assets and holdings. By employing a merge, acquire and hold strategy, we expect to maximize the value and potential of private, often family run, enterprises while providing diversification and risk mitigation for all shareholders. Our portfolio is comprised of mature, high growth and niche companies with great management, in an identifiable market, which they have penetrated through a significant advantage, and have acceptable margins.

 

Recent Developments

 

During 2018 we acquired, Red Rock Travel Group located in Orlando, FL and Platinum Tax Defenders located in Simi Valley, California.

 

Current Business Operations

 

Cardiff Lexington Corp (formerly Cardiff International, Inc.), is currently structured as a company with holdings of various companies.

 

The following milestones are estimates only. The working capital requirements and the projected milestones are approximations only and subject to adjustment based on sales, costs and needs.

 

CARDIFF LEXINGTON CORP (FORMERLY CARDIFF INTERNATIONAL, INC.) is a public Holding company utilizing a new form of Collaborative Governance. Cardiff targets acquisitions of undervalued, niche companies with high growth potential, income-producing businesses, including commercial real estate properties all of which offer high returns for our investors. Our goal is to provide a form of governance enabling businesses to take advantage of the power of a public company without losing management control. Cardiff provides companies the ability to raise money and investors a low risk environment that protects their investment.

 

MISSION TUITION (www.missiontuition.com): Cardiff through Mission Tuition has built one of the largest merchant shopping networks in America consisting of all the top name merchants; offering in-store savings and coupon savings with local, regional and national merchants throughout America. With each purchase members earn rebates which goes directly into their educational savings account. Our Tax-Free educational savings program provides a platform for families to start an “educational savings” program that encourages regular and daily use of the program. The Mission Tuition program helps families save for college. Mission Tuition encourages members to contribute to their educational savings with contribution from work, family members or just rebates generated by online and in- store purchases. The Mission Tuition program leverages the two biggest economic forces in society –– consumer spent and the cost of education –– to create the most unique value-added rewards program in decades. Cardiff’s missiontuition.com helps solve a real need for America’s families – saving for your child’s college education.

 

We have currently placed Mission Tuition on hold until the Company can hire the appropriate management team.

 

WE THREE, LLC (D/B/A AFFORDABLE HOUSING INITIATIVE) (“AHI”): AHI is located in Maryville, Tennessee. AHI acquires both mobile homes and mobile home parks offering an alternative to traditional housing. Their mobile home business is a popular option for a homeowner wishing to avoid large down payments, expensive maintenance costs, monthly mortgage payments and high property taxes. If bad credit is an issue preventing people from purchasing a traditional house, AHI will provide a financial leasing option with “O” interest on the lease providing a “lease to own” option for their family home. Most homes are 3 bedroom/2bath homes making the dream of owning a home possible.

 

ROMEO’S NY PIZZA, INC.: Romeo’s NY Pizza – Established in Paterson, New Jersey in 1945. Romeo’s NY Pizza makes authentic NY pizza, making their dough in-house, using the finest cheese and ingredients available. No soggy crust or watered down pizza sauce, only the best. They also serve Chicken Wings, Philly Steak Subs, Calzones and Salads.

 

 

 

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EDGE VIEW PROPERTIES LLC: Edge View Properties consists of 30 prime acres of land; 23.5 acres zoned MDR (Medium Density Residential) with 12 lots already platted and 48 lots zoned HDR (High Density Residential), 4 acres of dedicated river front property zoned for recreation on the Salmon River, Idaho’s premier whitewater river and 2.5 acres zoned for commercial use. All land is in the city limits of Salmon and adjacent to the Frank church Wilderness Park (the largest wilderness park in the lower 48 states).

 

REPICCI’S FRANCHISE GROUP:  The Company sold Refreshment Concepts in 2018; and still operate both Repicci’s Franchise Group and FDR Enterprises; Repicci’s Franchise Group offers franchisees for the operation of “Repicci’s Italian Ice” franchises. FDR is a Company owned franchisee. Repicci’s specialize in the distribution of nonfat frozen confections.

 

The number of franchise agreements in force as of December 31, 2018 are 49, five of which are “mobile” unites.

 

The Company obligates itself to each franchisee to perform the following services:

 

  1. Designate an exclusive territory;

 

  2. Provide guidance and approval for selection and location of site;

 

  3. Provide initial training of franchisee and employees;

 

  4. Provide a company manual and other training aids.

 

The Company has developed a new “Mobile Franchise Opportunity”. The total investment for the new opportunity ranges from $155,600 to $165,000, as follows:

 

$125,000 for a new Mercedes Sprinter Van, customized for the franchisee, $25,000 for the franchise fee, the balance for product. The Company’s obligation is as above, except for Item #3, training is specific to the new opportunity.

 

Critical Accounting Estimates

 

The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. We base our estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. On an on-going basis, we evaluate the appropriateness of our estimates and we maintain a thorough process to review the application of our accounting policies. Our actual results may differ from these estimates.

 

We consider our critical accounting estimates to be those that (1) involve significant judgments and uncertainties, (2) require estimates that are more difficult for management to determine, and (3) may produce materially different results when using different assumptions. We have discussed these critical accounting estimates, the basis for their underlying assumptions and estimates and the nature of our related disclosures herein with the audit committee of our Board of Directors. We believe our accounting policies specific to share-based compensation expense and estimation of the fair value of derivative liability involve our most significant judgments and estimates that are material to our consolidated financial statements. They are discussed further below.

 

 

 

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Derivative Liability

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses the probability weighted average Lattice Binomial models to value the derivative instruments at inception and on subsequent valuation dates through the December 31, 2018 reporting date. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative liabilities are classified as current liabilities as of December 31, 2018 and December 31, 2017. 

 

Share-based compensation expense

 

The Company accounts for its stock-based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.

 

The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

 

If the Company is a newly formed corporation or shares of the Company are thinly traded, the use of share prices established in the Company’s most recent private placement memorandum (based on sales to third parties), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

The fair value of share options and similar instruments is estimated on the date of grant using a lattice-binomial option pricing valuation model. The ranges of assumptions for inputs are as follows:

 

  · Expected term of share options and similar instruments: The expected life of options and similar instruments represents the period of time the option and/or warrant are expected to be outstanding. Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and employees expected exercise and post vesting employment termination behavior into the fair value (or calculated value) of the instruments. Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

 

  · Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f) (2)(ii) a thinly traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market
     
  · Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.

 

 

 

 15 

 

 

Generally, all forms of share-based payments, including stock option grants, warrants and restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest.

 

The expense resulting from share-based payments is recorded in general and administrative expense in the statements of operations.

 

Stock Based Compensation – Nonemployees

 

Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services

 

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of Subtopic 505-50 of the FASB Accounting Standards Codification (“Subtopic 505-50”).

 

Pursuant to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur. If the Company is a newly formed corporation or shares of the Company are thinly traded the use of share prices established in the Company’s most recent private placement memorandum, or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

The fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option pricing valuation model. The ranges of assumptions for inputs are as follows:

 

  · Expected term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

 

  · Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f) (2)(ii) a thinly traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

  · Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.

 

  · Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.

 

 

 

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Pursuant to ASC paragraph 505-50-257, if fully vested, no forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra equity by the grantor of the equity instruments.

 

The transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services. Section 505-50-30 provides guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.

 

Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a share option and similar instrument that the counterparty has the right to exercise expires unexercised.

 

Pursuant to ASC paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.

 

Inflation

 

We do not believe that inflation will negatively impact our business plans.

 

Seasonality.

 

We do not expect our revenues to be impacted by seasonal demands for our services.  However Repicci’s is a seasonal business who has shown growth each year in total revenue.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

See next page. Remainder of this page intentionally left blank.

 

 

 

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INDEX TO FINANCIAL STATEMENTS

 

    Page
Reports of Independent Registered Public Accounting Firm   19 - 20 
     
Consolidated Balance Sheets   21
     
Consolidated Statements of Operations   22
     
Consolidated Statements of Shareholders’ Deficit   23
     
Consolidated Statements of Cash Flows   26
     
Notes to Consolidated Financial Statements   28

 

 

 

 

 

 

 

 18 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of

Cardiff Lexington Corp.

(formerly Cardiff International, Inc.)

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Cardiff Lexington Corp (formerly Cardiff International, Inc.) and its subsidiaries (collectively, the “Company”) as of December 31, 2017, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern Matter

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Restatement

 

As discussed in Note 18 the financial statements have been restated for changes to previously issued financial statements that were issued erroneously by the Company.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

/s/ MaloneBailey, LLP

www.malonebailey.com

Houston, Texas

June 29, 2018 

We have served as the Company's auditor since 2017.

 

 

 

 

 

 19 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

Cardiff Lexington Corporation (formerly Cardiff International, Inc.)

Ft. Lauderdale, Florida

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Cardiff Lexington Corporation (formerly known as Cardiff International, Inc.) (the “Company”) at December 31, 2018, and the related consolidated statements of operations, changes in stockholders’ deficit (deficit), and cash flows for each of the year then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the consolidated financial statements, the Company has sustained net losses and has accumulated and working capital deficits, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

 

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provide a reasonable basis for our opinion.

 

/s/ Daszkal Bolton LLP

 

We have served as the Company’s auditor since 2018.  

Ft. Lauderdale, Florida April 16, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 20 

 

 

CARDIFF LEXINGTON CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER  31, 2018 AND DECEMBER 31, 2017

(Audited)

 

   December 31, 
   2018   2017 
ASSETS        
         
Current assets          
Cash  $118,307   $68,986 
Accounts receivable-net   64,345    63,061 
Inventory-net   3,079    46,928 
Prepaid and other   46,596    11,631 
Total current assets   232,327    190,606 
           
Property and equipment, net of accumulated depreciation of $921,904 and $1,030,231, respectively   381,301    491,474 
Land   603,000    603,000 
Intangible assets, net       15,561 
Goodwill   2,092,048     
Deposits   24,600    16,600 
Other assets   7,790    1,820 
Total assets  $3,341,066   $1,319,061 
           
LIABILITIES AND SHAREHOLDERS' (DEFICIT)          
           
Current liabilities          
Accounts payable and accrued expense  $1,094,521   $470,097 
Accrued expenses - related parties   747,000    495,250 
Interest payable   366,297    312,192 
Due to officers and shareholders   137,816    77,640 
Deferred Income   1,036,039     
Line of credit   1,999    15,498 
Common stock to be issued   500    500 
Notes payable, unrelated party   676,477    215,979 
Notes payable - related party   265,242    144,189 
Convertible notes payable, net of debt discounts of $201,024 and $245,494, respectively   785,776    616,381 
Convertible notes payable - related party   165,000    165,000 
Derivative Liability   1,870,625    2,236,656 
Total current liabilities   7,147,292    4,749,382 
           
Other Liabilities          
Convertible notes payable, net of current portion   1,040,000     
           
Total liabilities  $8,187,292   $4,749,382 

 

The accompanying notes are an integral part of these audited consolidated financial statements

 

 

 

 21 

 

 

CARDIFF LEXINGTON CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

AS OF DECEMBER 31, 2018 AND DECEMBER 31, 2017

(Audited)

 

  December 31, 
   2018   2017 
         
         
Shareholders' (deficit)          
Preferred stock          
Preferred Stock all classes          
Preferred Stock Series A - 4 Shares authorized, with par value of $.001, 1 and 1 share issued and outstanding at September 30, 2018 and December 31, 2017  $   $ 
Preferred Stock Series B- 10,000,000 shares authorized, with par value of $.001, 2,773,206 and 2,798,205 shares issued and outstanding at December 31, 2018 and December 31, 2017   2,773    2,798 
Preferred Stock Series C- 10,000 shares authorized, with par value of $.0.001, 119 and 117 shares issued and outstanding at December 31, 2018 and December 31, 2017        
Preferred Stock Series  D- 1,000,000 shares authorized, with par value of $.001, 400,000 shares issued and outstanding at December 31, 2018 and December 31, 2017   400    400 
Preferred Stock Series  E- 2,000,000 shares authorized, with par value of $.001, 241,199  shares issued and outstanding at December 31, 2018 and December 31, 2017   241    241 
Preferred Stock Series  F- 500,000 shares authorized, with par value of $.001, 280,069 shares issued and outstanding at December 31, 20187 and December 31, 2017   280    280 
Preferred Stock Series  F-1- 500,000 shares authorized, with par value of $.001, 57,193 shares issued and outstanding at December 31, 2018 and December 31, 2017   57    57 
Preferred Stock Series  G- 2,000,000 shares authorized, with par value of $.001, -0- shares issued and outstanding        
Preferred Stock Series  H- 4,859,379 shares authorized, with par value of $.001, -0- and 4,859,379 shares issued and outstanding       4,859 
Preferred Stock Series  H-1- 3,000,000 shares authorized, with par value of $.001, -0-  shares issued and outstanding        
Preferred Stock Series  I- 20,000,000 shares authorized, with par value of $.001, -0- and 203,655 shares issued and outstanding at December 311, 2018 and December 31, 2017       204 
Preferred Stock Series J- 10,000,000 shares authorized, with par value of $.001,- 0-  shares issued and outstanding        
Preferred Stock Series J1- 7,500,000 shares authorized, with par value of $.001, -0- shares issued and outstanding        
Preferred Stock Series K-10,937,500 shares authorized, with par value of $.001, 8,200,562  shares issued and outstanding at December 31, 2018   8,200     
Preferred Stock Series K1-35,000,000 shares authorized, with par value of $.001, 1,447,157 shares issued and outstanding at December 31, 2018   1,447     
Preferred Stock Series L-100,000,000 shares authorized, with par value of $.001, 98,307,692 shares issued and outstanding at December 31, 2018   98,308     
Preferred I Shares to be issued   200,000     
Common stock; 7,500,000,000 shares authorized with $0.001 par value; 602,826 and 44,808 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively (reflects post reverse stock split of 1500:1)   603    45 
Additional paid-in capital   50,220,067    45,674,137 
Accumulated deficit   (55,378,603)   (49,113,352)
Total shareholders'  (deficit)   (4,846,226)   (3,430,321)
           
Total liabilities and shareholders' (deficit)  $3,341,066    1,319,061 

 

The accompanying notes are an integral part of these audited consolidated financial statements

 

 

 

 22 

 

 

CARDIFF LEXINGTON CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2018 AND DECEMBER 31,2017

(AUDITED)

 

   DECEMBER 31, 
    2018    2017 
           
REVENUE          
Rental income  $186,096   $193,601 
Food and beverage   883,135    1,066,991 
Sales to franchisees          
Ice cream   193,071    131,487 
Franchise fees   45,316    81,435 
Royalty fees   19,500    19,500 
Truck and build out       129,000 
Tax Services   899,748     
Travel Services   147,072     
Other       3,754 
Total revenue   2,373,938    1,625,768 
           
COST OF SALES          
Rental business   182,690    155,416 
Food and beverage   950,358    1,276,493 
Tax Services   337,986     
Travel Services   156,664     
Total cost of sales   1,627,698    1,431,909 
           
GROSS MARGIN   746,240    193,859 
           
OPERATING EXPENSES          
Depreciation and amortization expense   22,697    160,171 
Impairment of asset   300,000     
Goodwill impairment   1,459,725    932,529 
Loss on disposal of assets       38,584 
Selling, general and administrative   3,267,836    2,055,115 
Total operating expenses   5,050,258    3,186,399 
           
LOSS FROM OPERATIONS   (4,304,018)   (2,992,540)
           
OTHER INCOME (EXPENSE)          
Other income   1,743    108,234 
Bad debt expense   (23,607)    
(Loss) from extinguishment of debt       (45,933)
Change in value of derivative liability   (629,176)   (36,469)
Gain/(loss) on sale of assets   874     
Interest expense   (360,331)   (111,682)
Amortization of debt discounts   (950,736)   (573,605)
Total other income (expenses)   (1,961,233)   (659,455)
           
NET (LOSS) FOR THE PERIOD  $(6,265,251)  $(3,651,995)
           
(LOSS) PER COMMON SHARE  -BASIC AND DILUTED  $(10.41)  $(126.20)
           
WEIGHTED AVERAGE NUMBER OF COMMON SHARES - BASIC AND DILUTED   602,038    28,937 

 

The accompanying notes are an integral part of these audited consolidated financial statements

 

 

 23 

 

 

CARDIFF LEXINGTON CORP. (FORMERLY CARDIFF INTERNATIONAL, INC.)

CONSOLIDATED STATEMENT OF SHAREHOLDERS'  (DEFICIENCY)

FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 and 2018

 

    Preferred Stock Series A    Preferred Stock Series B, D, E, F, F-1, H, I    Preferred Shares to be issued    Preferred Stock, Series C 
    Shares    Amount    Shares    Amount     Shares    Amount    Shares    Amount 
Balance December 31, 2016   1   $    5,480,050   $       $    118   $ 
Common stock issued for payment of accrued expenses                                        
Cancellation of Common Stock - accrued liabilities                                        
Conversion of convertible notes payable                                        
Common stock issued for debt settlement - related party                                        
Shares issuance for prior conversion error                                        
Series B Preferred Stock issued for debt settlement             24,000    24                     
Common stock issued for services                                        
Cancellation of Common Stock                                        
Common stock compensation for shares cancellation                                        
Preferred B issued for service             15,906    16                     
Common stock issued for cash                                        
Issuance of Series I Preferred Stock for cash             112,746    113                     
Preferred I issued for cash  - related party             90,909    101                     
Conversion of Series B Preferred Stock             (1,627,732)   (1,628)                    
Conversion of Series F1 Preferred Stock             (115,955)   (116)                    
Conversion of Series C Preferred Stock                                 (1)     
Conversion of Series I Preferred Stock                                      
Series H Preferred Stock issued for prior year acquisition             4,859,379    4,859                     
Warrants granted                                        
Derivative resolution upon conversion                                        
Reclassified to Derivative liabilities from Additional Paid in Capital                                        
Net loss                                        
Balance December 31, 2017 (Restated)   1   $    8,839,303   $8,849       $    117   $ 

 

 

 24 

 

 

CARDIFF LEXINGTON CORP. (FORMERLY CARDIFF INTERNATIONAL, INC.)

CONSOLIDATED STATEMENT OF SHAREHOLDERS'  (DEFICIENCY) (continued)

FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 and 2018

 

    Preferred Stock Series A    Preferred Stock Series B, D, E, F, F-1, H, I    Preferred Shares to be issued    Preferred Stock, Series C 
    Shares    Amount    Shares    Amount     Shares    Amount    Shares    Amount 
Balance December 31, 2017 (Restated)   1   $    8,839,303   $8,849       $    117   $ 
Conversion of Series B Preferred Stock           (33,999)   (34)                
Conversion of Series H  Preferred Stock           (2,546,259)   (2,546)                
Common stock issued for services - Eurasian consulting agreement                                
Conversion of convertible notes payable                                
Warrants granted for services                                
Conversion of Series I  Preferred Stock           (203,655)   (204)                
Conversion of Series H  Preferred Stock           (2,313,210)   (2,313)                
Issuance of Series K Preferred Stock for acquisition           8,200,562    8,201                 
Issuance of Series K-1  Preferred Stock for acquisition           1,447,157    1,447                 
Issuance of Series C  Preferred Stock for services                           2    0 
Issuance of Series L  Preferred Stock for acquisition           98,307,692    98,308                 
Cancelation of previously issued common shares for services                                
Common shares issued for accrued expense                                
Common shares to be issued for subsidiary obligation                                
Issuance of I preferred shares for officer compensation - bonus                       200,000         
Correction of previous issuance of commons shares for accrued expense                                
Reclass of settlements                                        
Reclassified to Derivative liabilities from Additional Paid in Capital                                
Net loss                                
Balance December 31, 2018   1   $    111,697,591   $111,707       $200,000    119   $0 

 

 

 25 

 

 

CARDIFF LEXINGTON CORP. (FORMERLY CARDIFF INTERNATIONAL, INC.)

CONSOLIDATED STATEMENT OF SHAREHOLDERS'  (DEFICIENCY) (continued)

FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 and 2018

 

   Common Stock   Additional Paid-   Accumulated     
   Shares   Amount   in Capital   Deficit   Total 
Balance December 31, 2016   17,604   $18   $43,856,562   $(45,461,357)  $(1,599,297)
                          
Common stock issued for payment of accrued expenses   12,667    13    1,415,587         1,415,600 
                          
Cancellation of Common Stock - accrued liabilities   (333)   (0)   (2,500)        (2,500)
                          
Conversion of convertible notes payable   6,322    6    143,857         143,863 
                          
Common stock issued for debt settlement - related party   1,496    1    535,967         535,968 
                          
Shares issuance for prior conversion error   1    0    76         76 
                          
Series B Preferred Stock issued for debt settlement             21,756         21,780 
                          
Common stock issued for services   1,505    2    277,269         277,271 
                          
Cancellation of Common Stock   (667)   (1)   (999)        (1,000)
                          
Common stock compensation for shares cancellation   33    0    2,998         2,998 
                          
Preferred B issued for service             6,338         6,354 
                          
Common stock issued for cash   67    0    10,000         10,000 
                          
Issuance of Series I Preferred Stock for cash             19,887         20,000 
                          
Preferred I issued for cash  - related party             9,899         10,000 
                          
Conversion of Series B Preferred Stock   5,426    5    1,623          
                          
Conversion of Series F1 Preferred Stock   387    0    116          
                          
Conversion of Series C Preferred Stock   67    0    (0)         
                          
Conversion of Series I Preferred Stock   235    0    (0)         
                          
Series H Preferred Stock issued for prior year acquisition             724,048         728,907 
                          
Warrants granted             219,210         219,210 
                          
Derivative resolution upon conversion             405,443         405,443 
                          
Reclassified to Derivative liabilities from Additional Paid in Capital             (1,972,999)        (1,972,999)
                          
Net loss                  (3,651,995)   (3,651,995)
                          
Balance December 31, 2017 (Restated)   44,808   $45   $45,674,137   $(49,113,352)  $(3,430,321)

 

 

 

 26 

 

 

CARDIFF LEXINGTON CORP. (FORMERLY CARDIFF INTERNATIONAL, INC.)

CONSOLIDATED STATEMENT OF SHAREHOLDERS'  (DEFICIENCY) (continued)

FOR THE YEARS ENDED DECEMBER 31, 2016, 2017 and 2018

 

   Common Stock   Additional Paid-   Accumulated     
   Shares   Amount   in Capital   Deficit   Total 
Balance December 31, 2017 (Restated)   44,808   $45   $45,674,137   $(49,113,352)  $(3,430,321)
Conversion of Series B Preferred Stock   113    0    34         
                          
Conversion of Series H  Preferred Stock   2,122    2    2,544         
                          
Common stock issued for services - Eurasian consulting agreement   2,591    3    86,749        86,751 
                          
Conversion of convertible notes payable   549,441    549    996,755        997,304 
                          
Warrants granted for services                    
                          
Conversion of Series I  Preferred Stock   204    0    203         
                          
Conversion of Series H  Preferred Stock   1,928    2    2,311         
                          
Issuance of Series K Preferred Stock for acquisition           166,799        175,000 
                          
Issuance of Series K-1  Preferred Stock for investment in acquisition           98,553        100,000 
                          
Issuance of Series C  Preferred Stock for services           720.0        720 
                          
Issuance of Series L  Preferred Stock for acquisition           1,179,692.3        1,278,000 
                          
Cancelation of previously issued common shares for services   (667)   (1)   1         
                          
Common shares issued for accrued expense   2,286    2    239,998        240,000 
                          
Common shares to be issued for subsidiary obligation                    
                          
Issuance of  I preferred shares for officer compensation - bonus                   200,000 
                          
Correction of previous issuance of commons shares for accrued expense           (80,000)       (80,000)
                          
Reclass of settlements             80,574         80,574 
                          
Reclassified to Derivative liabilities from Additional Paid in Capital           1,770,997        1,770,997 
                          
Net loss               (6,265,251.0)   (6,265,251)
                          
Balance December 31, 2018   602,826   $603   $50,220,067   $(55,378,603)  $(4,846,226)

 

The accompanying notes are an integral part of these audited consolidated financial statements

 

 

 

 27 

 

 

CARDIFF INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2018 AND DECEMBER 31,2017

(AUDITED)

 

    2018    2017 
           
CASH FLOWS FROM OPERATING ACTIVITIES          
Net (Loss) from continuing operations  $(6,265,251)  $(3,651,995)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:          
Depreciation   80,165    227,959 
Loss (gain) from disposal of fixed assets   (874)   38,584 
Loss (gain) from impairment of goodwill   1,459,725    932,529 
Loss (gain) on settlement of liabilities       (38,220)
Loss on settlement of note payable - related party       84,153 
Amortization of loan discount   950,736    573,605 
Change in value of derivative liability   629,176    36,469 
Stock based compensation   287,472    285,623 
Warrants expense       96,753 
Convertible note issued for conversion cost reimbursement   137,705     
Other Income   16,338     
Convertible note issued for services rendered       80,000 
(Increase) decrease in:          
Accounts receivable   88,047    (31,053)
Inventory   43,849    (4,699)
Deposits        
Prepaids and other   (34,965)   25,359 
Other assets   344,251    (15,072)
Intangible assets   15,561     
Increase(decrease) in:          
Accounts payable   455,741    140,837 
Accrued expenses   (371,551)   (152,261)
Accrued expenses - related party        
Interest payable   269,706    80,740 
Taxes payable   (15,865)   (7,579)
Accrued payroll taxes   (98,868)   (39,736)
Accrued officers' salaries   411,487    723,100 
Other liabilities - deferred revenue   323,316     
           
Net cash used in operating activities   (1,274,099)   (614,904)

 

 

 

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CARDIFF INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2018 AND DECEMBER 31,2017

(AUDITED)

 

    2018    2017 
INVESTING ACTIVITIES          
Purchase of intangible       (5,000)
Purchase of fixed assets   (852,000)    
Disposal (Purchase) of fixed assets   91,847    (7,800)
           
Net cash provided by (used in) investing activities   (760,153)   (12,800)
           
FINANCING ACTIVITIES          
Due from related party       (91,791)
Due to related party   111,996     
Proceeds from sales of stock       40,000 
Due to shareholder        
Proceeds from convertible notes payable   1,702,603    687,200 
Proceeds from notes payable - related party   121,053    46,176 
Proceeds from notes payable       25,343 
Repayments of convertible notes payable       (10,000)
Repayments of notes payable       (68,684)
Proceeds from line of credit       16,841 
Repayments to line of credit   (13,499)   (11,343)
           
Net cash provided by financing activities   1,922,153    633,742 
           
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   (112,100)   6,038 
           
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   230,407    62,948 
           
CASH AND CASH EQUIVALENTS, END OF PERIOD  $118,307   $68,986 
           
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid during the period for:          
Interest  $215,601   $30,866 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Common stock issued upon conversion of notes payable  $997,303   $143,863 
Common stock issued for settlement of expense  $160,000   $1,415,600 
Series H Preferred Stock issued for acquisition of Repicci Group  $   $728,907 
Common stock cancellation related to accrued liability  $   $2,500 
Series I Preferred Stock issued for compensation  $200,000   $ 
Series B preferred shares issued for debt settlement  $   $60,000 
Conversion of preferred stock to common stock  $5,097   $1,744 
Debt discount from issuance of warrant  $   $219,210 
Derivative liability settled upon conversion  $1,770,997   $405,443 
Derivative liability settled upon conversion  $   $1,972,999 
Debt discount from derivative liabilities  $   $535,878 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Nature of Operations

 

Legacy Card Company (“Legacy”) was formed as a Limited Liability Company on August 29, 2001. On April 18, 2005, Legacy converted from a California Limited Liability Company to a Nevada Corporation. On November 10, 2005, Legacy merged with Cardiff Lexington Corp. (“Cardiff”, the “Company”), a publicly held corporation.

 

In the first quarter of 2013, it was decided to restructure Cardiff into a holding company that adopted a new business model known as "Collaborative Governance," a form of governance enabling businesses to take advantage of the power of a public company. Cardiff began targeting the acquisition of, niche companies with high growth potential,. The reason for this strategy was to protect the Company’s shareholders by acquiring businesses with little to no debt, seeking support with both financing and management that had the ability to offer a return to investors. 

 

Description of Business

 

To date, Cardiff consists of the following wholly-owned subsidiaries:

 

We Three, LLC (Affordable Housing Initiative) acquired on May 15, 2014;

Romeo’s NY Pizza acquired on June 30, 2014;

Edge View Properties, Inc. acquired on July 16, 2014;

FDR Enterprises, Inc. acquired on August 10, 2016;

Refreshment Concepts, LLC acquired on August 10, 2016;

Repicci’s Franchise Group, LLC acquired on August 10, 2016;

Red Rock Travel Group, was acquired July31, 2018

Platinum Tax Defenders, LLC was acquired July 31, 2018

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Cardiff, and its wholly-owned subsidiaries: We Three, LLC; Romeo’s NY Pizza; Edge View Properties, Inc.; FDR Enterprises, Inc.; Refreshment Concepts, LLC, Repicci’s Franchise Group, LLC, Red Rock Travel Group, and Platinum Tax Defenders LLC. All significant intercompany accounts and transactions are eliminated in consolidation. Certain prior period amounts may have been reclassified for consistency with the current period presentation. These reclassifications would have no material effect on the reported financial results.

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Management uses its historical records and knowledge of its business in making estimates. Accordingly, actual results could differ from those estimates.

 

Change in Capital Structure

 

Om March 25, 2019 the Company announced a 1:1500 reverse split of its Common stock, which has been given retrospective treatment in the consolidated financial statements.

 

 

 

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Revenue Recognition

 

For the year-ended December 31, 2017, in general, the Company recognized revenue on an accrual basis. Revenue is generally realized or realizable and earned when all of the following criteria are met:

 

1) persuasive evidence of an arrangement exists between the Company and our customer(s);

2) services have been rendered;

3) our price to our customer is fixed or determinable; and

4) collectability is reasonably assured.

 

Rental Income

 

The Company’s rental income is derived from the mobile home leases. The expired leases are considered month-to-month leases. In accordance with section 605- 10-S99-1 of the FASB Accounting Standards Codification for revenue recognition, the cost of property held for leasing by major classes of property according to nature or function, and the amount of accumulated depreciation in total, is presented in the accompanying consolidated balance sheets as of December 31, 2017 and 2016. There are no contingent rentals included in income in the accompanying statements of operations. With the exception of the month-to-month leases, revenue was recognized on a straight-line basis and amortized into income on a monthly basis, over the lease term.

 

Restaurant Sales

 

Revenue from restaurant sales were recognized when food and beverage products are sold. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities.

 

On January 1, 2018, we adopted Topic 606 using the modified retrospective method which did not have a material impact to the opening balance of accumulated deficit.. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606

 

The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied. Substantially all of the Company’s revenue is recognized at the time control of the products transfers to the customer.

 

The Company generates revenue from our subsidiaries primarily on a cash basis for sale of food items and monthly rentals of mobile homes. As allowed by a practical expedient in Topic 606, the entity recognizes revenue in the amount to which the entity has a right to invoice. The term between invoicing and when payment is due is not significant.

 

Our subsidiary Repicci, generates revenues through franchise fees. Revenues from franchise fees are recognized in accordance with guidance Topic 606, as the reference objections are satistied. The perinate franchise fees associated with the right to intellectual property is earned over the life of the franchise agreement, which can be up to 15 years.

 

Our segmented revenue is disclosed more fully in our financial statements, see footnote 10 for further details.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company has no cash equivalents.

 

 

 

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Accounts Receivable

 

Accounts receivable is reported on the balance sheet at gross amounts due to the Company. Management closely monitors outstanding accounts receivable and charges off to expense any balances that are determined to be uncollectible. As of December 31, 2018 and 2017, the Company had accounts receivable of $64,345 and $63,061, respectively. Accounts receivables are primarily generated from our subsidiaries in their normal course of business.

 

Inventory

 

Inventory consists of finished goods purchased, which are valued at the lower of cost or market value, with cost being determined on the first-in, first-out (FIFO) method. The Company periodically reviews historical sales activity to determine potentially obsolete items and also evaluates the impact of any anticipated changes in future demand.

 

Property and Equipment

 

Property and equipment are carried at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation and amortization of property and equipment is provided using the straight-line method for financial reporting purposes at rates based on the following estimated useful lives:

 

Classification Useful Life
Equipment, furniture and fixtures 5 - 7 years
Leasehold improvements 10 years or lease term, if shorter

 

During the years ended December 31, 2018 and 2017, depreciation and amortization expense was $80,165 and $227,959 ($108,039 is included in Cost of Goods Sold), respectively.

 

Goodwill and Other Intangible Assets

 

Goodwill and indefinite-lived brands are not amortized, but are evaluated for impairment annually or when indicators of a potential impairment are present. Our impairment testing of goodwill is performed separately from our impairment testing of indefinite-lived intangibles. The annual evaluation for impairment of goodwill and indefinite-lived intangibles is based on valuation models that incorporate assumptions and internal projections of expected future cash flows and operating plans. The Company believe such assumptions are also comparable to those that would be used by other marketplace participants. During years-ended December 31, 2018 and 2017, the company had Goodwill impairment of $1,459,725 and $932,529, respectively, related to its acquisitions of FDR Enterprises, Inc.; Refreshment Concepts, LLC; and Repicci’s Franchise Group, LLC. (collectively referred to as “Repicci’s Group”) and Red Rock Travel Group. The Company based this decision on impairment testing off the underlying assets, expected cash flows, decreased asset value and other factors.

 

Valuation of long-lived assets

 

In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as plant and equipment and construction in progress held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets.

 

 

 

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Valuation of Derivative Instruments

 

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-10, Derivatives and Hedging (“ASC 815-10”), requires that embedded derivative instruments be bifurcated and assessed, along with freestanding derivative instruments such as convertible promissory notes, on their issuance date to determine whether they would be considered a derivative liability and measured at their fair value for accounting purposes. The Company evaluates all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued at each reporting date, with changes in the fair value reported as charges or credits to income.

 

For option based simple derivative financial instruments, the Company uses the Lattice Binomial option pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period.

 

Beneficial Conversion Feature

 

For conventional convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”) and related debt discount.

 

When the Company records a BCF, the relative fair value of the BCF is recorded as a derivative liability with an offset against the face amount of the respective debt instrument which is and amortized to interest expense over the life of the debt.

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs), and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

 

Level Input Definition

 

Level 1 Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.

 

Level 2 Inputs, other than quoted prices included in Level 1, which are observable for the asset or liability through corroboration with market data at the measurement date.

 

Level 3 Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date.

 

The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s Consolidated Balance Sheets on a recurring basis and their level within the fair value hierarchy as of December 31, 2018 and 2017.

 

 

 

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   Level 1   Level 2   Level 3   Total 
Fair Value of BCF Derivative Liability – December 31, 2018  $   $   $1,870,625   $1,870,625 

 

   Level 1   Level 2   Level 3   Total 
Fair Value of BCF Derivative Liability – December 31, 2017  $   $   $2,236,656   $2,236,656 

  

Stock-Based Compensation – Employees

 

The Company accounts for its stock based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.

 

The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

 

Generally, all forms of share-based payments, including stock option grants, warrants and restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest.

 

The expense resulting from share-based payments is recorded in general and administrative expense in the consolidated statements of operations.

 

Stock-Based Compensation – Non Employees

 

Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services

 

The Company earky adopted ASU No 2018-07 for equity instruments issued to parties other than employees.

 

Income Taxes

 

Income taxes are determined in accordance with ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

 

For the years ended December 31, 2018 and 2017 the Company did not have any interest and penalties associated with tax positions. As of December 31, 2018 and 2017, the Company did not have any significant unrecognized uncertain tax positions.

 

 

 

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Earnings (Loss) per Share

 

FASB ASC Subtopic 260, Earnings Per Share (“ASC 260”), provides for the calculation of "Basic" and "Diluted" earnings per share. Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, warrants, and debts convertible into common shares. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s Common Stock can result in a greater dilutive effect from potentially dilutive securities.

 

The following table sets forth the computation of basic and diluted earnings per common share for the years ended December 31, 2018 and 2017. During a period of net loss, all potentially dilutive securities are anti-dilutive. Accordingly, for the years ended December 31, 2018 and 2017 potentially dilutive securities have been excluded from the computations since they would be anti-dilutive. However, these dilutive securities could potentially dilute earnings per share in the future (weighted average reflected post 1500:1 reverse stock split):

 

   For the years ended 
   December 31, 2018   December 31, 2017 
         
Numerator:          
Net (loss)  $(6,265,251)  $(3,651,995)
           
Denominator:          
Weighted-average shares outstanding   602,038    28,937 
           
Basic (loss) per share  $(10.41)  $(126.20)

 

This does not include the potential dilutive effect if all exercisable warrants were exercised or conversions of convertible notes and convertible preferred stock as described below as of December 31, 2018:

 

   2018   2017 
Principal and Interest conversion   3,133,104    41,660 
Warrants   5,833     
Preferred Stock conversion   350,167    209,650 
Total   3,489,104    250,310 

 

Going Concern

 

The accompanying consolidated financial statements have been prepared using the going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The Company has sustained operating losses since its inception and has negative working capital and an accumulated deficit. These factors raise substantial doubts about the Company’s ability to continue as a going concern. As of December 31, 2018, the Company has sustained recurring loses and accumulated a working capital deficit. The accompanying consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might result if the Company is unable to continue as a going concern. As a result, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2018 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

 

 

 

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The ability of the Company to continue as a going concern and the appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusions. Management has prospective investors and believes the raising of capital will allow the Company to fund its cashflow shortfalls and pursue new acquisitions. There can be no assurance that the Company will be able to obtain sufficient capital from debt or equity transactions or from operations in the necessary time frame or on terms acceptable to it. Should the Company be unable to raise sufficient funds, it may be required to curtail its operating plans. In addition, increases in expenses may require cost reductions. No assurance can be given that the Company will be able to operate profitably on a consistent basis, or at all, in the future. Should the Company not be able to raise sufficient funds, it may cause cessation of operations.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02,” Leases” (Topic 842) which includes a lessee accounting model that recognizes two types of leases - finance leases and operating leases. The standard requires that a lessee recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or an operating lease. New disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases are also required. These disclosures include qualitative and quantitative requirements, providing information about the amounts recorded in the financial statements. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

 

In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”, to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. The amendments are effective for fiscal years beginning after December 15, 2017 and should be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted, including adoption in an interim period.

 

Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the Company’s financial position, results of operations or cash flows.

 

2. ACQUISITIONS

 

Platinum Tax Defenders

 

On July 31, 2018, the Company completed the acquisition of Platinum Tax Defenders. In connection with the closing of the acquisition, a Preferred “L” Class of stock with a par value of $0.001 was established and issued. The Preferred “L” Class of stock rights and privileges include voting rights, a conversion ratio of 1:1.25 and were distributed at the adjusted rate of $0.013 per share (pre-splt) for a total of 98.307,692 representing a value of $1,278,000. These Preferred “L” shares have a lock-up/leak-out limiting the sale of stock for 12 months after which conversions and sales are limited to 20% of their portfolio per year, pursuant to the terms of the Acquisition Agreement. The preliminary purchase allocation of the net assets acquired is as follows:

 

   Platinum Fair Value 
Cash  $138,906 
Accounts receivable   105,669 
Other assets   60,041 
Property and equipment   6,010 
Goodwill   2,092,048 
Liabilities   (272,674)
Total  $2,130,000 

 

 

 

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Red Rock Travel Group

 

On July 31, 2018, the Company completed the acquisition of Red Rock Travel Group. In connection with the closing of the acquisition, on July 30th, 2018 a Preferred “K” Class of stock with a par value of $0.001 was established and issued. The Preferred “K” Class of stock rights and privileges include voting rights, a conversion ratio of 1:1.25 and were distributed at the adjusted rate of $0.021 per share (pre-splt) for a total of 8,200,562 representing a value of $175,000. These Preferred “K” shares have a lock-up/leak-out limiting the sale of stock for 12 months after which conversions and sales are limited to 20% of their portfolio per year, pursuant to the terms of the Forward Acquisition Agreement. The preliminary purchase allocation of the net assets acquired is as follows:

 

  Red Rock Fair Value
Cash  $22,515
Intangible assets*  300,000
Property and equipment  55,286
Goodwill*  1,459,725
Liabilities  (1,662,526)
Total  $175,000

 

* Subsequent to the acquisition, the Company determined that the intangible assets and goodwill should be fully impaired and written off.

 

The results of the operations for Platinum and Red Rock have been included in the consolidated financial statements since the date of the acquisitions (July 31, 2018). The following table presents the unaudited pro forma results of continuing operations for the years ended December 31, 2018 and 2017, respectively, as if the acquisitions had been consummated at the beginning of the period presented. The pro forma results of continuing operations are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisitions occurred at the beginning of the period presented or the results which may occur in the future.

 

   Pro Forma 2018   Pro forma 2017 
         
REVENUE   1,393,687    4,393,687 
           
NET INCOME (LOSS) FOR THE PERIOD  $(7,211,221)  $(7,211,221)

 

4. ACCRUED EXPENSES

 

As of December 31, 2018, and December 31, 2017, the Company had accrued expenses of $1,310,074 and $740,696, respectively, consisted of the following:

 

   December 31,
2018
   December 31,
2017
 
         
Accrued salaries – related party  $747,000    470,000 
Lease payable – related party       25,250 
Accrued expenses – other   563,074    245,446 
Total  $1,310,074    740,696 

 

5. PLANT AND EQUIPMENT, NET

 

Plant and equipment, net as of December 31, 2018 and 2017 was $381,301 and $491,474, respectively, consisting of the following:

 

  December 31,   December 31, 
   2018   2017 
Furniture, fixture and equipment   715,466    904,375 
Leasehold improvements   161,166    672,159 
Total   876,632    1,576,534 
Less: accumulated depreciation   (495,331)   (1,085,060)
Plant and equipment, net   381,301    491,474 

 

 

 

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During the years ended December 31, 2018 and 2017, depreciation expense was $80,165 and $227,959, respectively. During the year end December 31, 2018 and 2017, the Company accounts for depreciation as a separate item in the operational expense of $22,697 and $160,171, respectively and included $57,468 and $108,039, respectively in depreciation in cost of goods sold.

 

During the December 31, 2018, the Company disposed fixed assets of $104,886 and related liabilities related to a company-owned franchise, resulting in net cash flow of $91,847 and a gain on sale of $874 from disposal. During the December 31, 2017, the Company disposed fixed assets of $101,434, resulting in accelerated depreciation expense of $101,434 from disposal of fixed assets.

 

6. LAND

 

As of December 31, 2018 and 2017, the Company had land of $603,000 located in Salmon, Idaho with area of approximately 30 acres, which was in connection with the acquisition of Edge View Properties, Inc. in July 2014. The Company issued 241,199 shares of Series E Preferred Stock as consideration for this acquisition. The land is currently vacant and is expected to be developed into residential community.

 

7. LINE OF CREDIT

 

On December 28, 2016, the Company entered into an unsecured Business Line of Credit Agreement with Fundation Group LLC (“Fundation”), pursuant to which the Company was allowed to take a draw from Fundation up to $20,000 from time to time. The Line of Credit bears interest at a rate of 11.49% per annum, subject to increase or decrease with 90 days notice. There was an initial closing fee of $500 and a 2% draw fee on subsequent draws. Monthly principal and interest payments are due and the line is due in full in 18 months from the latest draw. The outstanding principal and interest will be due in payments over 18 months.

 

As of December 31, 2018 and 2017, The Company had balance of $1,999 and $15,498, respectively.  During the year ended December 31, 2018, the Company made a cash payment of $13,499. (Included in Note 10)

 

8. RELATED PARTY TRANSACTIONS 

 

Due to Officers and Officer Compensation

 

During the year ended December 31, 2018, the Company borrowed $25,000 from a corporate officer, which was repaid. During the year ended December 31, 2017, the Company repaid a total of $91,791 to related parties.

 

Refreshment Concepts, LLC leases its premises from its prior owner under a month-to-month lease at the rate of $1,500 per month. As of December 31, 2018 and December 31, 2017, the Company had lease payable of $-0- and $25,250, respectively to the related party, which is reflected in accrued expenses – related party .

 

On January 24, 2017, the Company issued 2,010,490 (pre-split) shares of Common Stock to settle $482,518 due to the prior owner of Refreshment Concepts LLC, pursuant to the Acquisition Agreement, dated August 10, 2016. The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $0.24 per share (pre-splt), resulting in loss from extinguishment of debt in amount of $80,420.  

  

On January 24, 2017, the Company issued 173,585 shares of Common Stock to settle $41,660 due to the prior owner of Repicci’s Franchise Group LLC, pursuant to the Acquisition Agreement, dated August 10, 2016. The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $0.24 per share, resulting in loss from extinguishment of debt in amount of $6,943. As of December 31, 2017 and December 31, 2016, the outstanding balance due (included in accrued liabilities to related parties on the financial statements) to the same prior owner was $0 and $40,550, respectively.

 

During the second quarter of 2017, the prior owner of Repicci’s Franchise Group LLC submitted a subscription agreement to the Company regarding the purchase of 90,909 shares of the Company’s Series I Preferred Stock by cash payment of $10,000, which was collected during the second quarter of 2017. The transaction was independently negotiated between the Company and the related party. The proceeds from the subscription agreement mitigated the Company’s cash pressure in short term. The 90,909 shares of Series I Preferred Stock were issued as of December 31, 2017.

 

 

 

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During the second quarter of 2017, the Company issued 906,907 shares of Common Stock to We three Inc., a related party, for services rendered. The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $.0799 per share. Accordingly, the Company recognized stock based compensation of $72,462 to the consolidated statements of operations for December 31, 2017.

 

The Company borrows funds from Daniel Thompson, who is a Shareholder and Officer of the Company. The terms of repayment stipulate the unsecured loans are due 24 months after the launch of the Legacy Tuition Card (or prior to such date) at an annual interest rate of 6 % per year. As of December 31, 2018 and 2017, the Company had $77,640 due (included in due to officers and shareholders on the financial statements) to Daniel Thompson, respectively.

  

In addition, the Board of Directors of the Company approved to increase Daniel Thompson’s compensation to $25,000 per month from $20,000 effective January 1, 2017. Accordingly, a total salary of $300,000 and $300,000 were accrued and reflected as an expense to Daniel Thompson during the year ended December 31, 2018 and 2017, respectively. During the year ended December 31, 2017, the Company issued 10,000,000 (pre-split ) shares of Common Stock for forgiveness of $800,000 in accrued salaries. The accrued salaries payable to Daniel Thompson was $317,500 and $117,500 as of December 31, 2018 and 2017, respectively.

 

The Company had an employment agreement with a former Chief Operating Officer, Mr. Levy, whereby the Company provided for compensation of $15,000 per month in 2015 and $10,000 per month in 2016. Mr. Levy resigned on June 7, 2016 at which time $160,000 was owed. . During the year ended December 31, 2017, the Company issued 1,000,000 (pre -reverse 1500:1 stock split) shares of Common Stock for forgiveness of $80,000 in accrued salaries. The total balance due to Mr. Levy for accrued salaries at December 31, 2018 was $80,000.

 

The Company had an employment agreement with the Chief Operating Officer, Mr. Roberts, whereby the Company provided for compensation of $10,000 per month effective in June 2016. The total balance due to Mr. Roberts for accrued salaries at December 31, 2018 and 2017 were $107,000 and $70,000, respectively. In addition, the Company agreed to grant Mr. Roberts stock options for a minimum of 300,000 shares of the Company's common stock at an exercise price of 50% of the current last ten (10) day stock average per share, and 600,000 shares of common stock as a key officer employment incentive to be earned and vested on a pro rata basis at 25,000 shares per month for twenty-four (24) months. The fair value of both 300,000 options and 600,000 shares were determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $0.226 per share. On August 8, 2017, Mr. Roberts accepted the offer from the Company to issue 3,000,000 (pre-splt) common shares for forgiveness of all accrued expenses, options, and common stock granted totaling $135,600 through June 2016.  Additionally, the Company issued 1,000,000 ((pre-splt)) shares of Common Stock as a bonus to Mr. Roberts for his past service to the Company. The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $.07 (pre-splt) per share. Accordingly, the Company recognized stock based compensation of $70,000 to the consolidated statements of operations for the year ended December 31, 2017.

 

The Board of Directors of the Company approved to increase Chief Executive Officer, Mr. Cunningham’s compensation to $25,000 per month from $15,000 effective January 1, 2017. A total salary of $300,000 and $300,000 were accrued and reflected as an expense during the year ended December 31, 2018 and 2017, respectively. During the year ended December 31, 2017, the Company issued 5,000,000 (pre -reverse 1500:1 stock split) shares of Common Stock for forgiveness of $400,000 in accrued salaries. The total balance due to Mr. Cunningham for accrued salaries at December 31, 2018 and 2017 were $322,500 and $122,500, respectively.

 

Notes Payable – Related Party

 

The Company has entered into several unsecured loan agreements with related parties (see below; Footnote 11, Notes Payable – Related Party; and Footnote 12 Convertible Notes Payable – Related Party).

  

9. NOTES AND LOANS PAYABLE

 

Notes payable at December 31, 2018 and 2017 are summarized as follows:

 

  December 31,   December 31, 
   2018   2017 
Loans Payable Unrelated Party  $665,488   $215,979 
Notes Payable – Unrelated Party   10,989     
Notes Payable – Related Party   265,242    144,189 
Total   941,719    360,168 
Current portion   (941,719)   (360,168)
Long-term portion  $   $ 

 

 

 

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As of December 31, 2018, the Company had lease payable of $40,521 in connection with two capital leases on two Mercedes Sprinter Vans for the ice cream subsidiary and two loans for auto loan for the vehicles used in the Pizza restaurants and Repicci’s Group and for daily operations. There are purchase options at the end of all lease terms that are based on the fair market value of the vans at the time.

 

The balance of $624,967 in notes payable and loans to unrelated party was due primarily by our new subsidiary Red Rock Travel Group, for funds received through various loans.

 

Notes Payable – Unrelated Party

 

During the year end December 31, 2017, the Company received $25,343 from third parties and repaid $68,684

 

On March 12, 2009, the Company entered into an unsecured preferred debenture agreement (Note 5) with a shareholder for $20,000. The note bore interest at 12% per year and matured on September 12, 2009. In conjunction with the preferred debenture, the Company issued 2,000,000 (pre-splt) warrants to purchase its Common Stock, exercisable at $0.10 (pre-splt) per share and expired on March 12, 2014. As a result, of the warrants issued, the Company recorded a $20,000 debt discount during 2009 which has been fully amortized. The Company assigned all of its receivables from consumer activations of the rewards program as collateral on this debenture. On March 24, 2011, the Company amended the note and the principal balance was reduced to $15,000. The Company was due to pay annual principal payments of $5,000 plus accrued interest beginning March 12, 2012. On July 20, 2011, the Company repaid $5,000 of the note. No warrants had been exercised before the expiration. As of December 31, 2018, the Company was in default on this debenture. The balance of the note was $10,989 and $10,989 at December 31, 2018 and December 31, 2017, respectively.

 

As of December 31, 2017, the Company had lease payable of $140,317 in connection with 2 capital leases on 2 Mercedes Sprinter Vans for the ice cream section. There are purchase options at the end of all lease terms that are based on the fair market value of the vans at the time. The leases are not in default at the current time.

 

The balance of $64,673 in notes payable to unrelated party was due to the auto loan for the vehicles used in the Pizza restaurants and Repicci’s Group and for daily operations. The loans carry interest from 0% to 6% interest and are not currently in default.

 

Notes Payable – Related Party 

 

During the year end December 31, 2018, the Company received $174,955 from related parties. During the year end December 31, 2017, the Company received $46,176 from related parties

 

On September 7, 2011, the Company entered into an unsecured Promissory Note agreement (“Note 1”) with a related party for $50,000. Note 1 bears interest at 8% per year and matured on September 7, 2016. Interest is payable annually on the anniversary of Note 1, and the principal and any unpaid interest were due upon maturity. In conjunction with Note 1, the Company issued 2,500,000 shares (pre-split) of its Common Stock to the lender. As a result of the shares issued in conjunction with Note 1, the Company recorded a $50,000 debt discount during 2011. The balance of Note 1, net of debt discount, was $50,000 and $50,000 at December 31, 2018 and December 31, 2017 respectively. Note 1 is currently in default.

 

On November 17, 2011, the Company entered into an unsecured Promissory Note agreement (“Note 2”) with a related party for $50,000. Note 2 bears interest at 8% per year and matured on November 17, 2016. Interest is payable annually on the anniversary of Note 2, and the principal and any unpaid interest were due upon maturity. In conjunction with Note 2, the Company issued 2,500,000 shares (pre-split) of its Common Stock to the lender. As a result of the shares issued in conjunction with Note 2, the Company recorded a $50,000 debt discount during 2011. The balance of Note 2, net of debt discount, was $50,000 and $50,000 at December 31, 2018 and December 31, 2017 , respectively. Note 2 is currently in default.

  

On August 4, 2015, the Company entered into an unsecured Promissory Note agreement (“Note 4 ”) with a related party for $19,500. Note 3  bears interest at 6% per year and matures on December 31, 2016. Interest is payable annually on the anniversary of Note 4, and the principal and any unpaid interest were due upon maturity. The principal balance of Note 4 $-0- as of December 31, 2017.

 

 

 

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As of December 31, 2018 the Company also had an unsecured note payable of $50,747 and to the prior owner of Red Rock . The note is due on demand and carries no interest.

 

As of December 31, 2018 the Company also had an unsecured note payable of $165,242 and to the prior owner of Platinum Tax Defenders. The note is due on demand and carries no interest.

 

As of December 31, 2017, the Company also had an unsecured note payable of $44,189, to the prior owner of Repicci’s Group. The note is due on demand and carries no interest.

 

10. CONVERTIBLE NOTES PAYABLE

 

Some of the Convertible Notes issued as described below included an anti-dilution provision that allowed for the adjustment of the conversion price. The Company considered the guidance provided by the FASB in “Determining Whether an Instrument Indexed to an Entity’s Own Stock,” the result of which indicates that the instrument is not indexed to the issuer’s own stock. Accordingly, the Company determined that, as the conversion price of the Notes issued in connection therewith could fluctuate based future events, such prices were not fixed amounts. As a result, the Company determined that the conversion features of the Notes issued in connection therewith are not considered indexed to the Company’s stock and characterized the value of the conversion feature of such notes as derivative liabilities upon issuance.

 

During 2018, the company received $1,702,603 cash proceeds, from convertible notes payable and repaid $-0- in cash. The company recorded amortization of debt discount of $950,736 related to convertible notes, during the year end December 31, 2018. During 2017, the company received $687,200 cash proceeds, from convertible notes payable and repaid $10,000 in cash. The company recorded amortization of debt discount of $573,605 related to convertible notes, during the year end December 31, 2017

 

During the year ended December 31, 2018, the Company received conversion notices for $748,571 of convertible debt and $251,733 in interest, penalties and fees, which were converted into 824,162,204 (pre reverse 1500:1 stock split) shares .

 

Convertible notes at December 31, 2018 and December 31, 2017 are summarized as follows:

 

   December 31,
2018
   December 31,
2017
 
         
Convertible Notes Payable – Unrelated Party  $2,026,800   $861,875 
Convertible Notes Payable – Related Party   165,000    165,000 
Discount on Convertible Notes Payable - Unrelated Party   (201,024)   (245,494)
Total  $1,990,775   $781,381 
Current Portion   950,775    781,381 
Long-Term Portion  $1,040,000   $ 

For the year-ended December 31, 2017:

 

Convertible Notes Payable – Unrelated Party

 

On April 17, 2014, the Company entered into an unsecured Convertible Note (“Note 4”) in the amount of $9,000. Note 4 was convertible into Common Shares of the Company at $0.005 per share at the option of the holder. Note 4 bore interest at eight percent per year, matured on June 17, 2014, and was unsecured. All principal and unpaid accrued interest was due at maturity. During the year end December 31, 2016, the note holder converted $3,715 principal and $1,310 accrued interest payable into 1,005,000 shares of common stock at a conversion price of $0.005 per share. And $3,000 of principal is forgiven by the note holder. In addition, the Company agreed to reimburse the holder’s certificate processing cost by adding $1,000 to the principal for each note conversion pursuant to an addendum, dated February 3, 2016. During the first quarter of 2017, the note holder converted $2,785 principal, $1,000 processing cost reimbursement and $102 accrued interest into 777,400 shares of common stock at a conversion price of $0.005 per share. The balance of Note 4 was $2,785 as of December 31, 2016, which was paid in full as of December 31, 2017.

 

 

 

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On July 29, 2015, the Company entered into an 8% convertible promissory note (“Note 6”) with an unrelated entity in the amount of $10,000. Note 6 matured on November 26, 2015. The note is convertible into common shares of the Company at the conversion ratio of 50% discount to market or $0.01, if the bid price falls below $0.10. Note 6 and accrued interest totaled $11,666 was paid in full by cash on May 1, 2017. The principal balance on Note 6 at December 31, 2016 and 2017 was $10,000 and zero, respectively. The derivative liabilities was reclassified as additional paid in capital due to the note being paid in cash as of June 30, 2017.

  

On February 9, 2016, the Company entered into a 15% convertible line of credit (“Note 7”) with an unrelated entity in the amount up to $50,000. On February 9, 2016, the Company received $17,500 cash for the line of credit, matured on February 9, 2017, and unsecured. Note 7 is convertible into common shares of the Company at the conversion ratio of $0.03 or 50% discount of the lowest closing price on the primary trading market on which Company's common stock is quoted for the last five trading days prior to the conversion date, whichever is lower. In January 2017, the Company determined that the conversion features contained in Note 7 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model as of January 2017 and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities.

 

Note 7 principal of $6,000 was converted into 200,000 shares of common stock at the end of 2016. During the year ended December 31, 2017, the Company recorded interest expense, late fee of 5% and default interest of 20% related to Note 7 in total amount of $9,258 and amortization of debt discounts in amount of $3,500. The balance of Note 7 was $11,500 with unamortized debt discount of $3,500 as of December 31, 2016, and without unamortized debt discount as of December 31, 2017. Note 7, is currently in default and will incur a late fee of 5% and default interest rate of 20%.

 

On October 28, 2016, the Company received $25,000 cash pursuant to the terms of Note 7, matures on October 28, 2017 (“Note 7-1”). Note 7-1 was entitled to conversion after April 28, 2017 which met the requirements for liability classification under ASC 815. See Footnote 10 for more information on derivative liabilities.

 

During the year ended December 31, 2017, the Company recorded interest expense related to Note 7-1 in amount of $11,454 and amortization of debt discount in amount of $18,333. This resulted in an unamortized debt discount of $-0- as of December 31, 2017. The balance of Note 7-1 was $25,000 as of December 31, 2017 and December 31, 2016, respectively. Note 7-1 is currently in default and will incur a late fee of 5% and default interest rate of 20%.

 

On March 8, 2016, the Company entered into a 15% convertible promissory note in the principal of $50,000 (“Note 8”) with an unrelated entity for services rendered. Note 8 is matured on March 8, 2017, and unsecured. This Note is convertible into common shares of the Company at the conversion ratio of $0.03 or 50% discount of the lowest closing price on the primary trading market on which Company's common stock is quoted for the last five trading days prior to the conversion date, whichever is lower. The Company determined that the conversion features contained in Note 8 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities.

 

On February 16, 2017, a portion of principal of $6,000 was converted into 200,000 shares of common stock at a conversion price of $0.03 per share.

  

On April 13, 2017, a portion of principal of $12,853, including $1,000 conversion cost reimbursement, plus accrued interest of $12,247 were converted into 836,667 shares of common stock at a conversion price of $0.03 per share.

 

 

 

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On May 4, 2017, a portion of principal of $6,000, including $2,000 conversion cost reimbursement, plus accrued interest of $70 were converted into 202,333 shares of common stock at a conversion price of $0.03 per share.

 

On July 6, 2017, a portion of principal of $18,147, and $1,000 conversion cost reimbursement, were converted into 704,733 shares of common stock at a conversion price of $0.03 per share.

 

Note 8 was in default with principal balance of $12,294 as of December 31, 2017. During the year ended December 31, 2017, the Company recorded late fee and default interest related to Note 8 in total amount of $8,748 and amortization of debt discounts in amount of $50,000 The balance of Note 8 was $50,000 with unamortized debt discount of $-0- as of December 31, 2016, and without unamortized debt discount as of December 31, 2017. Note 8, is currently in default and will incur a late fee of 5% and default interest rate of 20%.

 

On September 12, 2016, the Company entered into a 10% convertible promissory note in the principal of $80,000 (“Note 9”) with an unrelated entity for services rendered. Note 9 is matured on September 12, 2017, and unsecured. This Note is convertible into common shares of the Company at the conversion ratio of $0.03 or 50% discount of the lowest closing bid price on the primary trading market on which Company's common stock is quoted for the last five trading days prior to the conversion date, whichever is lower. The Company determined that the conversion features contained in Note 9 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities. Note 9 is currently in default and will incur a late fee of 5% and default interest rate of 20%.

 

As a result, Note 9 was discounted in the amount of $80,000 and amortized over the remaining life of this Note. As of September 12, 2017, the note was in default. During the year ended December 31, 2017, the Company recorded late fee and default interest related to Note 9 in total amount of $15,655 and amortization of debt discounts in amount of $80,000. The balance of Note 9 was $80,000 without unamortized debt discount as of December 31, 2016, and $80,000 with unamortized debt discount of $0 as of December 31, 2017. Note 9 is currently in default and will incur a late fee of 5% and default interest rate of 20%.

 

On January 24, 2017, the Company entered into a 10% convertible promissory note in the principal of $80,000 (“Note 10”) with an unrelated entity for services rendered. Note 10 is matured on January 24, 2018, and unsecured. This Note is convertible into common shares of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing bid price on the primary trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower. As of July 24, 2017 this Note is convertible into common shares of the Company as described above. The Company determined that the conversion features contained in Note 10 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities.

 

On October 25, 2017, a portion of principal of $15,000, plus $1,500 conversion cost reimbursement, were converted into 1,434,782 shares of common stock at a conversion price of $0.0115 per share.

 

On November 6, 2017, a portion of principal of $10,000, plus $1,500 conversion cost reimbursement, were converted into 1,212,121 shares of common stock at a conversion price of $0.0825 per share.

 

 

 

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As a result, Note 10 was discounted in the amount of $80,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company recorded amortization of debt discounts in amount of $35,555.56.. During the year ended December 31, 2017, the Company recorded interest expense related to Note 10 in amount of $5,494. The balance of Note 10 was $55,000 with unamortized debt discount of $19,444 as of December 31, 2017. Note 10 is currently in default and will incur a late fee of 5% and default interest rate of 20%.

 

On January 24, 2017, the Company entered into a 15% convertible line of credit (“Note 11”) with an unrelated entity in the amount up to $250,000. On January 24, 2017, the Company received $50,000 cash for the line of credit, is matured on January 24, 2018, and unsecured. Note 11 is convertible into common shares of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing price on the primary trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower. However, Note 11 is convertible after 6 months of the effective date of this Note, which is July 27, 2017. The Company determined that the conversion features contained in Note 10 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities.

 

As a result, Note 11 was discounted in the amount of $50,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company recorded amortization of debt discounts in amount of $43,611. During the year ended December 31, 2017, the Company recorded interest expense related to Note 11 in amount of $7,042. The balance of Note 11 was $50,000 with unamortized debt discount of $6,389 as of December 31, 2017. Note 11 is currently in default and will incur a late fee of 5% and default interest rate of 20%.

 

On February 21, 2017, the Company received $25,000 cash pursuant to the terms of Note 11, is matured on February 21, 2018 (“Note 11-1”). Note 11 is convertible into common shares of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing price on the primary trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower. However, Note 11-1 is convertible after 6 months of the effective date of this Note, which is August 21, 2017. The Company determined that the conversion features contained in Note 11-1 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities.

 

As a result, Note 11-1 was discounted in the amount of $25,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company recorded amortization of debt discounts in amount of $18,833. The balance of Note 11-1 was $0 without debt discount as of December 31, 2016. During the year ended December 31, 2017, the Company recorded interest expense related to Note 11 in amount of $3,260. The balance of Note 11-1 was $25,000 with unamortized debt discount of $6,667 as of December 31, 2017. Note 11-1 is currently in default and will incur a late fee of 5% and default interest rate of 20%.

 

On March 16, 2017, the Company received $40,000 cash pursuant to the terms of Note 11, is matured on March 16, 2018 (“Note 11-2”). Note 11-2 is convertible into common shares of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing price on the primary trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower. However, Note 11-2 is convertible after 6 months of the effective date of this Note, which is September 16, 2017. The Company determined that the conversion features contained in Note 11-2 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities.

 

 

 

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As a result, Note 11-2 was discounted in the amount of $40,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company recorded amortization of debt discounts in amount of $23,556. The balance of Note 11-2 was $0 without debt discount as of December 31, 2016. During the year ended December 31, 2017, the Company recorded interest expense related to Note 11-2 in amount of $3,260. The balance of Note 11-2 was $40,000 with unamortized debt discount of $16,444 as of December 31, 2017. Note 11-2 is currently in default and will incur a late fee of 5% and default interest rate of 20%.

 

On April 6, 2017, the Company entered into a 15% convertible promissory note with an unrelated entity in the amount $50,000 (“Note 12”). Note 12 is matured on April 6, 2018, and unsecured. This Note is convertible into common shares of the Company at the conversion ratio of $0.25 or 50% of the lowest trading price on the primary trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower. However, Note 12 is convertible after 6 months of the effective date of this Note, which is October 6, 2017. The Company determined that the conversion features contained in Note 12 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities.

 

On November 8, 2017, a portion of principal of $6,503, plus $1,500 conversion cost reimbursement and $1,036 in interest, were converted into 1,095,636 shares of common stock at a conversion price of $0.0825 per share.

 

As a result, Note 12 was discounted in the amount of $50,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company recorded amortization of debt discounts in amount of $30,392.. During the year ended December 31, 2017, the Company recorded interest expense related to Note 12 in amount of $5,043. The balance of Note 12 was $43,478 with unamortized debt discount of $19,608 as of December 31, 2017. Note 12 is currently in default and will incur a late fee of 5% and default interest rate of 20%.

 

On April 21, 2017, the Company entered into a Securities Purchase Agreement with an unrelated entity, pursuant to which the purchasers agreed to pay the Company an aggregate of up to $600,000 for an aggregate of up to 660,000 in Principal Amount of Notes. The first tranche of $330,000 was closed simultaneously (“Note 13-1”). The proceeds of $300,000, net of $30,000 Original Issuance Discount, was received by the Company. Note 13-1 is convertible into common shares of the Company at the conversion ratio of 60% of the lowest trading price on the primary trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date. The Company determined that the conversion features contained in Note 13-1 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities.

 

On October 23 2017, a portion of principal of $5,000, plus $250 in interest, were converted into 383,772 shares of common stock at a conversion price of $0.013680 per share.

 

On November 14, 2017, a portion of principal of $7,500, plus $375 in interest, were converted into 795,455 shares of common stock at a conversion price of $0.00990 per share.

 

On December 7, 2017, a portion of principal of $10,000, plus $500 in interest, were converted into 714,286 shares of common stock at a conversion price of $0.01470 per share.

 

On December 27, 2017, a portion of principal of $20,000, plus $1,000 in interest, were converted into 1,125,402 shares of common stock at a conversion price of $0.013680 per share.

 

 

 

 45 

 

 

In addition, in connection with this Securities Purchase Agreement, the Company granted purchasers 2,357,143 warrants with exercise price of $0.14 per share (“Warrants A”), 1,885,715 warrants with exercise price of $0.175 per share (“Warrants B”) and 1,571,429 warrants with exercise price of $0.21 per share (“Warrants C”). Warrants A, B and C are exercisable on the grant date and expire in three years, each of which represents 100% of the Principal Amount at the Closing divided by the respective exercise price.  The fair value of these warrants was measured using the Black-Scholes valuation model at the grant date. Accordingly, the Company recorded warrant expenses at the fair market value of $219,210 during the year ended December 31, 2017. See footnote 13 for more information.

  

As a result, Note 13-1 was discounted in the amount of $330,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company recorded interest expenses related to Note 13-1 in amount of $10,142 and amortization of debt discounts in amount of $293,375. The balance of Note 13-1 was $287,500 with unamortized debt discount of $36,625 as of December 31, 2017. Note 13-1 is currently in default.

 

On October 6, 2017, the Company entered into a 12% convertible promissory note with an unrelated entity in the amount $82,500, which included an original issue discount of $6,600, for net cash to the company of $75,900 (“Note 14”). Note 14 is matured on July 6, 2018, and unsecured. This Note is convertible into common shares of the Company at the conversion ratio of 40% of the lowest trading price on the primary trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date. Note 12 is convertible after 9 months of the effective date of this Note, which is October 6, 2018. Neither derivative liability accounting nor beneficial conversion feature will be considered before Note 14 is entitled for conversion. During the year ended December 31, 2017, the Company recorded interest expense related to Note 14 in amount of $2,365 and amortization of debt discounts in amount of $2,079 for the original issue discount of $6,600. The balance of Note 14 was $82,500 unamortized debt discount of $4,521 on the original issue discount as of December 31, 2017. 

 

On November 2, 2017, the Company entered into a 8% convertible promissory note with an unrelated entity in the amount $54,600, with original issue discount of $2,100 for net cash to the company of $52,500 (“Note 15”). Note 15 is matured on November 2, 2018, and unsecured. This Note is convertible into common shares of the Company at the conversion rate of 60% of the lowest trading price on the primary trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower. The Company determined that the conversion features contained in Note 15 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities.

 

As a result, Note 15 was discounted in the amount of $54,600 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company recorded amortization of debt discounts in amount of $8,948. The balance of Note 15 was $0 without debt discount as of December 31, 2016. During the year ended December 31, 2017, the Company recorded interest expense related to Note 15 in amount of $716. The balance of Note 15 was $54,600 with unamortized debt discount of $45,652 as of December 31, 2017. 

 

On November 27, 2017, the Company entered into a 12% convertible promissory note with an unrelated entity in the amount $53,800 (“Note 16”). Note 16 is matured on November 27, 2018, and unsecured. This Note is convertible into common shares of the Company at the conversion ratio of 60% of the lowest trading price on the primary trading market on which Company's common stock is quoted for the last 20 trading days prior to the conversion date. Note 14 is convertible immediately. The Company determined that the conversion features contained in Note 16 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities.

 

 

 

 46 

 

 

As a result, Note 16 was discounted in the amount of $53,800 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company recorded amortization of debt discounts in amount of $5,081. The balance of Note 16 was $0 without debt discount as of December 31, 2016. During the year ended December 31, 2017, the Company recorded interest expense related to Note 16 in amount of $610. The balance of Note 16 was $53,800 with unamortized debt discount of $48,719 as of December 31, 2017.

 

On December 14, 2017, the Company entered into a 8% convertible promissory note with an unrelated entity in the amount $43,478, with original issue discount of $4,378 for net cash to the company of $40,000 (“Note 17”). Note 17 is matured on December 14, 2018, and unsecured. This Note is convertible into common shares of the Company at the conversion rate of 60% of the lowest trading price on the primary trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower. The Company determined that the conversion features contained in Note 17 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities.

 

As a result, Note 17 was discounted in the amount of $43,478 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company recorded amortization of debt discounts in amount of $2,053. The balance of Note 17 was $0 without debt discount as of December 31, 2016. During the year ended December 31, 2017, the Company recorded interest expense related to Note 17 in amount of $164. The balance of Note 15 was $43,378 with unamortized debt discount of $41,425 as of December 31, 2017. 

 

Convertible Notes Payable – Related Party

 

On April 21, 2008, the Company entered into an unsecured Convertible Debenture (“Debenture 1”) with a shareholder in the amount of $150,000. Debenture 1 was convertible into Common Shares of the Company at $0.03 per share at the option of the holder no earlier than August 21, 2008. Debenture 1 bore interest at 12% per year, matured in August 2009, and was unsecured. All principal and unpaid accrued interest was due at maturity. In conjunction with the Debenture 1, the Company also issued warrants to purchase 5,000,000 shares of the Company’s Common Stock at $0.03 per share. The warrants expired on April 20, 2013. As a result, of issued warrants, the Company recorded a $150,000 debt discount during 2008 which has been fully amortized. The Company was in default on Debenture 1, and no warrants had been exercised before expiration. The balance of Debenture 1 was $150,000 and $150,000 at December 31, 2017 and December 31, 2016, respectively. The Company recorded interest expense related to Debenture 1 in amount of $18,000 and $18,000 during the year ended December 31, 2017 and 2016, respectively.

 

On March 11, 2009, the Company entered into an unsecured Convertible Debenture (“Debenture 2”) with a shareholder in the amount of $15,000. Debenture 2 was convertible into Common Shares of the Company at $0.03 per share at the option of the holder. Debenture 2 bore interest at 12% per year, matured on March 11, 2014, and was unsecured. All principal and unpaid accrued interest was due at maturity. The Company was in default on Debenture 2. The balance of Debenture 2 was $15,000 and $15,000 at December 31, 2017 and December 31, 2016, respectively. The Company recorded interest expense related to Debenture 2 in amount of $1,800 and $1,800 during the years ended December 31, 2017 and 2016, respectively.

 

Resulting from the tainted issue by the derivative financial instrument of the convertible notes, The Company determined that the conversion features contained in Debenture 1 and Debenture 2 carrying value represents an embedded derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities.

 

 

 

 47 

 

 

As of December 31, 2017, the Company’s derivative liabilities are embedded derivatives associated with the Company’s convertible notes payable. Due to the Notes’ conversion feature, the actual number of shares of common stock that would be required if a conversion of the note as described in Note 9 was made through the issuance of the Company’s common stock cannot be predicted. As a result, the conversion feature requires derivative accounting treatment and will be bifurcated from the note and “marked to market” each reporting period through the statement of operations.

 

The Company used the Binomial-Lattice valuation model to measure the fair value of the derivative liabilities as $2,236,656 on December 31, 2017 and will subsequently remeasure the fair value at the end of each period and record the change of fair value in the consolidated statement of operation during the corresponding period.

 

The valuation of the derivative liabilities attached to the convertible debt was arrived at through the use of the Lattice Bi-nominal Option Pricing Model and the following assumptions:

 

      Year Ended December 31,  
      2017       2016  
Volatility     111.09% - 220.65%        
Risk-free interest rate     0.51% - 1.76%        
Expected term     .02-1        

 

For the year-ended December 31, 2018, the Company has recorded derivative liabilities associated with convertible debt instruments, as more fully discussed at Note 11.

 

Note # * Issuance   Maturity Rate    

12/31/2017

Principal Balance

  2018 Add Principal   2018 Principal Conversions   Shares issued upon conversion 2018   12/31/2018 Principal Balance  

Total

Interest expense for Year Ended 12/31/2018

  Accrued Interest as of 12/31/2018     Conversion price
3 R 9/7/2011   9/7/2016   8%     50,000                   50,000.00     4,055.56     24,055.56     Non-convertible
3-1 R 11/17/2011   11/17/2016   8%     50,000                   50,000.00     4,055.56     24,055.56     Non-convertible
4   4/17/2014   6/17/2014   8%                                   $.005 per share
5   3/12/2009   3/12/2014   0%     10,989                   10,989.00             Non-convertible
6   7/29/2015   11/26/2015   8%                                       50% of market, subject to change to $.01
                                                             
1 R 8/21/2008   8/21/2009   12%     150,000                   150,000.00     18,250.00     108,250.00      Short Term
2 R 3/11/2009   4/29/2014   12%     15,000                   15,000.00     1,825.00     10,825.00      Short Term
7   2/9/2016   2/9/2017   15%     11,500     1,500.00     (4,515.00 )   1,200,000     8,485.00     1,871.32     714.93     $.03 per share or 50% of market
7-1   10/28/2016   10/28/2017   15%     25,000                   25,000.00     6,319.44     5,320.63     $.03 per share or 50% of market
8   3/8/2016   3/8/2017   15%     10,000     1,500.00     (10,000.00 )   495,411     1,499.97     304.16     9,563.50     $.03 per share or 50% of market
9   9/12/2016   9/12/2017   10%     80,000                   80,000.00     16,222.22     31,875.78     $.03 per share or 50% of market
10   1/24/2017   1/24/2018   10%     55,000                   55,000.00     12,528.00     17,737.50     $.25 per share or 50% of market
11   1/27/2017   1/27/2018   15%     50,000     11,500.00     (58,802.00 )   44,810,143     2,698.00     8,079.61     (0.00 )   $.25 per share or 50% of market
11-1   2/21/2017   2/21/2018   15%     25,000                   25,000.00     6,398.31     1,028.92     $.25 per share or 50% of market
11-2   3/16/2017   3/16/2018   15%     40,000                   40,000.00     10,238.02     5,949.36     $.25 per share or 50% of market
12   4/6/2017   4/6/2018   15%     43,497     7,500.00     (19,000.00 )   19,286,260     31,997.00     10,573.79     6,770.88     $.25 per share or 50% of market
13-1   4/21/2017   4/21/2018   5%     287,500         (115,500.00 )   15,191,152     172,000.00     9,863.26     12,105.63     $.30 per share or 60% of the lowest trading price for 10 days
14   10/6/2017   7/6/2018   12%     82,500     5,112.65     (87,612.65 )   66,879,492         6,288.42     0.00     40% of the lowest trading price for 10 days
15   11/2/2017   11/2/2018   8%     54,600         (54,600.00 )   47,973,252         2,959.60     0.00     60% of the lowest trading price for 10 days
                                                             
16   11/27/2017    11/27/2018    12%     53,800     115,917.00     (122,992.00)     176,451,571     –      105,034.90      0.00      60% of the lowest trading or bid (whichever is lower) price for 20 days
                                                           
17   12/14/2017    12/14/2018    8%     43,478         (43,478.26)     8,248,054     –      1,979.02      0.00      60% of the lowest trading price for 10 days
                                                             
18   1/19/2018    1/19/209    12%         83,500.00     –          83,500.00     10,159.17     10,159.17     60% of the lowest trading price for 20 days
                                                             
19   2/21/2018    2/21/2019    8%         78,750.00     (78,750.00)     54,957,108     –      3,638.74     0     60% of the lowest trading price for 15 days
                                                             
20   3/29/2018    3/29/2019    8%         100,000.00     (74,900.00   145,598,889     25,100.00     6,579.82     2,672.82     60% of the lowest trading price for 15 days
                                                             
21   4/9/2018    4/9/2019    10%         147,000.00     (16,794.00   60,041,407      130,206.00     10,335.82     1,958.82     40% discount on the lowest trading price for previous 25 days
                                                             
22   7/10/2018    1/10/2021    12%      –      1,040,000.00      –      –      1,040,000.00      63,786.67      63,786.67       $0.04/ share or 40% of the lowest bid price for prior 21 days
                                                           
23   7/19/2018    12/31/2018    8%      –      43,478.26     (43,478.26   14,373,526         79.90     –       60% of the lowest trading price for 10 days
                                                             
24   7/19/2018    12/31/2018    8%         43,478.26     (43,478.26)     67,478,054         972.00     (0.00    60% of the lowest trading price for 10 days
                                                             
25   8/13/2018    2/13/2019    12%         126,560.00     (48,246.00)     101,177,885     78,314.00     6,068.14     1,724.14      $0.004/ share or 60% of the lowest trading price for prior 21 days
                                                             
26   8/10/2017    1/27/2018    15%                     20,000.00     1,533.33     1,533.33      $.25 per share or 50% of market
                                                             
27-1-4   12/10/2018   12/10/2019   8%         108.000.00             108,000.00     504.00     504.00     60% of the lowest trading price for 10 days
                                                             
28   12/5/2018   12/5/2019   8%         100,000.00            

100,000.00

    466.67     466.67     55% of the lowest trading price for 15 days

 

 

  Convertible  $861,875   $2,013,796   $(822,146)   824,162,204   $2,026,800   $302,784   $173,873   
  Non-Convertible  $10,989   $   $       $10,989   $   $   
SUMMARY Related Party Convertible  $165,000   $   $       $165,000   $20,075   $119,075   
  Related Party Non-Convertible  $100,000   $   $       $100,000   $8,111   $48,111   
   Total  $1,137,864   $2,013,796   $(822,146)   824,162,204   $2,302,789   $330,970   $341,059   

* R = Related Party

 

 

 48 

 

 

 

 

11. FAIR VALUE MEASUREMENT

 

The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.

 

The Company adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:

 

The following are the hierarchical levels of inputs to measure fair value:

 

  Level 1 – Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
  Level 2 Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
  Level 3 – Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable & accrued expenses, certain notes payable and notes payable – related party, approximate their fair values because of the short maturity of these instruments.

 

The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed in note 12. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using terms in the notes that are subject to volatility and market price of the underlying common stock of the Company.

 

As of December 31, 2018 and December 31, 2017, the Company did not have any derivative instruments that were designated as hedges.

 

The derivative liability as of December 31, 2017, in the amount of $2, 236,656 has a level 3 classification.

  

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities for the year ended December 31, 2017:

 

Derivative Liability, December 31, 2016   
Day 1 Loss   1,287,744 
Discount from derivatives   535,878 
Warrants reclassified to derivative liabilities   96,753 
Tainting of Convertible notes   1,972,999 
Resolution of derivative liability upon conversion   (405,443)
(Gain) on Change in Fair Value   (1,251,275)
      
Derivative Liability, December 31, 2017   2,236,656 

 

 

 

 49 

 

 

Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. During the year ended December 31, 2017, the Company’s stock price decreased from initial valuation and thus, the derivative liability also decreased.  Generally, as the stock price decreases for each of the related convertible notes that have an embedded derivative liability, the value of the derivative liability decreases. Stock price is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s convertible notes with an embedded derivative liability.

 

The Company used the Binomial-Lattice valuation model to measure the fair value of the derivative liabilities as $2,236,656 on December 31, 2017, and will subsequently remeasure the fair value at the end of each period, and record the change of fair value in the consolidated statement of operation during the corresponding period. The Company recorded a net change of derivative liability of $36,469 for the year ended December 31, 2017.

 

 

The derivative liability as of December 31, 2018, in the amount of $1,870,625 has a level 3 classification.

  

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities for the year ended December 31, 2018:

 

Derivative Liability, December 31,2017   2,236,656 
Day 1 Loss   987,021 
Discount from derivatives   775,790 
Resolution of derivative liability upon conversion   (1,770,997)
Mark to market adjustment   (357,845)
Derivative Liability, December 31, 2018   1,870,625 

 

The above tables also include derivative liabilities related to warrants to purchase common stock of $3,795 at December 31, 2018. Net loss for the period included mark-to-market adjustments relating to the liabilities held during the year ended December 31, 2018 in the amounts of $629,176.

 

Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. During the year ended December 31, 2018, the Company’s stock price decreased from initial valuation. As the stock price decreases for each of the related derivative instruments, the value to the holder of the instrument generally decreases. Stock price is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments.

 

The valuation of the derivative liabilities attached to the convertible debt was arrived at through the use of the Lattice Bi-nominal Option Pricing Model and the following assumptions:

 

      For the period ended  
     

December 31,

2018

     

December 31,

2017

 
Volatility     182.91%-636.13%       111.09% - 220.65%  
Risk-free interest rate     2.13% -2.72%       0.51% - 1.76 %  
Expected term     .04 - 5.14       .02-1.00  

 

12. PAYROLL TAXES

  

The Company previously reported that it has failed to remit payroll tax payments since 2006, as required by various taxing authorities. Payroll taxes and estimated penalties were accrued in recognition of accrued salaries subsequently settled via stock issue and other agreements that did not result in reportable or taxable payroll transactions. These accruals were reversed for prior years, and a similar estimated accrual established for 2018 and 2017. As of December 31, 2018 and December 31, 2017, the Company estimated the amount of taxes, interest, and penalties that the Company could incur as a result of payroll related taxes and penalties to be $9,865 and $2,047, respectively.

 

 

 

 50 

 

  

13. CAPITAL STOCK

 

2017

 

During the first quarter of 2017, the Company filed Amended Articles of Incorporation with the Secretary of State of Florida to amend the rights and privileges for series of Preferred Stock, and to authorize the issuance of Series I, F1, G1, H1, J1 and K1 Preferred Stock, which was effective on April 26, 2017.

 

Series A Preferred Stock

 

The Company has designated four shares of preferred stock as Series A Preferred Stock (“Series A”), with a par value of $.0001 per share, of which one share of preferred stock was issued and outstanding as of December 31, 2017 and December 31, 2016. Series A is authorized to have four shares which do not bear dividends and converts to common shares at four times the sum of: all shares of Common Stock issued and outstanding at time of conversion plus all shares of Series B Preferred Stock issued and outstanding at time of conversion divided by the number of issued Class A shares at the time of conversion, and have voting rights four times the sum of: all shares of Common Stock issued and outstanding at time of voting plus all shares of Series B Preferred Stocks issued and outstanding at time of voting divided by the number of Class A shares issued at the time of voting.

 

Series B Preferred Stock

 

The Company has designated 3,000,000 shares of preferred stock as Series B Preferred Stock (“Series B”), with a par value $0.001 and $2.50 price per share, of which 2,798,205 shares of Series B preferred stock were issued and outstanding as of December 31, 2017. Shares of Series B are anti-dilutive to reverse splits. The conversion rate of shares of Series B, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. Series B is awarded “Voting Right” at the ratio of 1 vote per share owned. Each one share of Series B converts to 5 shares of Common Stock. The price of each share of Series B may be changed either through a majority vote of the Board of Directors through a resolution at a meeting of the Board of Directors, or through a resolution passed at an Action Without Meeting of the unanimous Board of Directors, until such time as a listed secondary and/or listed public market develops for the shares.

 

During the year ended December 31, 2016, 591,997 shares of Series B Preferred Stock were converted into 2,959,985 shares of Common Stock of the Company per the preferred shareholder’s instruction.

 

During the first quarter of 2017, 1,406,829 shares of Series B Preferred Stock were converted into 7,034,145 shares of Common Stock of the Company per the preferred shareholder’s instruction.

 

On March 30, 2017, the Company issued 24,000 shares of Series B Preferred Stock to settle legal expenses of $60,000. Based on the price of $.9075 per share for the Series B Preferred Stock, which was determined by the market price of common stock at $.1815 per share on the issuance date multiplied by the conversion ratio of 1:5, the fair value of the stock issuance of Series B Preferred Stock was $21,780, resulting in gain from extinguishment of debt in amount of $38,220.

 

During the second quarter of 2017, 193,904 shares of Series B Preferred Stock were converted into 969,520 shares of Common Stock of the Company per the preferred shareholder’s instruction.